Polymold Division

PRESENTED BY:
KYLE HULSE
HUY HUYNH
TARIK NASRAWI
MICHAEL STOHR
Agenda

Introduction
Underlying assumptions
Financial forecasts (without CAD/CAM vs. with CAD/CAM)
Weighted-Average Cost of Capital Calculation
NPV Evaluation
Recommendation and limitations
Introduction

Main issues faced by the division:

Losing competitive advantage
Falling productivity
Market share seized by competitors
Uncertainty in making investing decision
Underlying Assumptions

Uses of historical data:

Receivables = Days of sales
Inventories = Days of COGS
Account payables = Days of COGS
Prepaid expenses = Percentage of Sales
COGS remains constant at 72% after 1984 in forecasting with CAD/CAM
Cost of Debt = Risk free rate (5-year T-Bonds) + Implied Risk Premium
Capital structure and profit margin were used to select our comparables
Cost of equity is calculated using CAPM model
 Financial Forecasts (without CAD/CAM)

Income Statement 1983 1984 1985 1986 1987 1988

Total COGS as Percent of
Average increase (decrease) per year: 0.8% (COGS) & 0.18% (Mkt
Sales 73.00% 73.80% 74.60%Share)75.40% 76.20% 77.00%

$210,000. $229,000 $253,900 $267,000 $278,000 $298,294

Total Market Sales 00 .00 .00 .00 .00 .00
Polymold Market Share 5.10% 4.92% 4.74% 4.56% 4.38% 4.20%
$10,710.0 $11,266. $12,034. $12,175. $12,176. $12,528.
Net Sales 0 80 86 20 40 35
$8,314.9 $8,978.0 $9,180.1 $9,278.4 $9,646.8
Cost of Goods Sold $7,818.30 0 1 0 2 3
Cost-Reduction Program -$37.00 -$210.00 -$255.25 -$300.50 -$345.75 -$391.00
Selling, General, and $1,338.9 $1,365.7 $1,393.0 $1,420.9 $1,449.3
Administrative $1,312.74 9 7 9 5 7
 Financial Forecasts (without CAD/CAM)
Balance Sheet 1983 1984 1985 1986 1987 1988
Receivables, Net (Days of $2,716.3 $2,901.5 $2,935.3 $2,935.6 $3,020.5
Sales) $2,582.14 8 6 9 8 3
Inventories, Net (Days of
COGS) $127.91 $133.23 $143.39 $145.97 $146.84 $152.15
Prepaid Expenses (% of
Sales) $68.25 $71.80 $76.69 $77.59 $77.59 $79.84
$2,921.4 $3,121.6 $3,158.9 $3,160.1 $3,252.5
Total Current Assets $2,778.30 1 4 4 1 2
$6,178.0 $6,712.0 $7,074.0 $7,455.0 $7,996.0
Fixed Assets $5,720.00 0 0 0 0 0
Less Accumulated $3,586.0 $4,022.0 $4,471.0 $4,917.0 $5,382.0
Depreciation $3,170.00 0 0 0 0 0
$2,592.0 $2,690.0 $2,603.0 $2,538.0 $2,614.0
Fixed Assets, Net $2,550.00 0 0 0 0 0
 Financial Forecasts (with CAD/CAM)
Income Statement 1983 1984 1985 1986 1987 1988
Total COGS as Percent of
Sales 73% 72% 72% 72% 72% 72%

$210,000. $229,000 $253,900 $267,000 $278,000 $298,294

Total Market Sales 00 .00 .00 .00 .00 .00
Polymold Market Share 5.10% 5.50% 5.90% 6.29% 6.69% 7.09%
$10,710.0 $12,590. $14,969. $16,804. $18,603. $21,149.
Net Sales 0 42 94 98 76 04
$9,065.1 $10,778. $12,099. $13,394. $15,227.
Cost of Goods Sold $7,818.30 0 36 59 71 31
Cost-Reduction Program -$37.00 -$445.00 -$534.25 -$623.50 -$712.75 -$802.00
Selling, General, and $1,332.4 $1,355.7 $1,379.4 $1,403.6 $1,428.1
Administrative $1,309.52 4 6 8 2 9
 COGS Break-Downs

WITHOUT CAD/CAM
COGS Broken Down 1982 1983 1984 1985 1986 1987 1988
73.80 74.60 75.40 76.20 77.00
COGS 72.00% 73.00% % % % % %
34.67 35.00 35.33 35.67 36.00
Labor 34.00% 34.33% % % % % %
11.33 11.50 11.67 11.83 12.00
Raw Materials 11.00% 11.17% % % % % %
3.20 3.60 4.00 4.40 4.80
Plant Administration 2.40% 2.80% % % % % %
24.60 24.50 24.40 24.30 24.20
Overhead 24.60% 24.70% % % % % %
WITH CAD/CAM
COGS Broken Down 1982 1983 1984 1985 1986 1987 1988
72.00 72.00 72.00 72.00 72.00
 Determining Market Share with CAD/CAM

5.10% 5.50% 5.90% 6.29% 6.69% 7.09% Possible Probabilities Expected

Market Share Percent Increase Per Year 0.398% Market (2) Market
Shares (1) Share
(1)x(2)
6.3% 35% 2.205%
7.3% 30% 2.19%
TOTAL 7.09%
29.29 7.7% 35% 2.695%
%
Crystal Ball Analysis:
Use Triangular distribution
Minimum = 6.30%
Projected = 7.30%
Maximum = 7.70%
 Financial Forecasts (with CAD/CAM)
Balance Sheet 1983 1984 1985 1986 1987 1988
$3,035.5 $3,609.1 $4,051.6 $4,485.2 $5,098.9
Receivables, Net $2,582.14 0 9 1 9 5
Inventories, Net $127.91 $141.70 $168.40 $188.65 $208.47 $237.13
Prepaid Expenses $68.25 $80.23 $95.40 $107.09 $118.55 $134.77
$3,257.4 $3,872.9 $4,347.3 $4,812.3 $5,470.8
Total Current Assets $2,778.30 3 8 5 1 5
$6,826.0 $7,657.0 $8,309.0 $9,179.0 $10,133.
Fixed Assets $5,720.00 0 0 0 0 00
Less Accumulated $3,683.0 $4,306.0 $5,000.0 $5,782.0 $6,676.0
Depreciation $3,170.00 0 0 0 0 0
$3,143.0 $3,351.0 $3,309.0 $3,397.0 $3,457.0
Fixed Assets, Net $2,550.00 0 0 0 0 0
$6,400.4 $7,223.9 $7,656.3 $8,209.3 $8,927.8
Total Assets $5,328.30 3 8 5 1 5
Finding our comparables

Avg. Debt Profit Unlevered

Company Beta
Ratio Margin Beta

Acme – Cleveland 18.85% 3.15% 0.9 0.806

Cincinnati 11.8% 4.05% 1.1 1.031

Ex-Cell-O 7.7% 4.9% 1.1 1.056

Norton 17.95% 4.3% 0.95 0.856

Stanley Works 13.45% 4.9% 0.95 0.882

Average Unlevered Beta 0.926

 WACC Calculation

Cost of debt = 11.76% + 5.11% =

16.87%
Debt ratio = 12.64% (Industry average)
Unlevered beta = 0.926
Cost of equity = 16.84%
WACC = 16.87%.(1-50%).(12.64%) +
16.84%.(1-12.64%) = 15.77%
Year Implied Risk Premium
1984 5.11%
http://pages.stern.nyu.edu/~
Source:
adamodar/New_Home_Page/datafile/implpr.html
Incremental NPV

Period
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Capital Investment $750.00
Accumulated depreciation $112.50 $277.50 $435.00 $592.50 $750.00
Year-end book value $750.00 $637.50 $472.50 $315.00 $157.50 $0.00
$1,059.8 $1,431.7
Working Capital $0.00 $220.38 $564.06 $815.04 4 4
$1,036.5 $1,130.0 $1,217.3 $1,431.7
Total book Value $857.88 6 4 4 4
$1,323.6 $2,935.0 $4,629.7 $6,427.3 $8,620.7
Sales 2 8 8 6 0
$1,010.8 $1,995.4 $3,057.7 $4,387.4
Cost of Good Sold $95.20 5 8 9 8
Other costs (SG&A +
Incremental NPV

Period
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
-
Capital Investment $750.00 $0.00
-
Change in working - - - - $371.9 $1,431
capital $220.38$343.68 $250.97 $244.80 0 .74
$1,323.$2,935. $4,629. $6,427. $8,620.
Sales 62 08 78 36 70
$1,010. $1,995. $3,057. $4,387.
Cost of good sold $95.20 85 48 79 48
Other costs (SG&A + $108.8
R&D) $123.44 $119.98 $116.39 $112.67 2
NPV = $1,180. $1,549. $1,983.
Tax $2,611.65
$496.24 $819.62 20 70 45
Recommendation and Limitations

Invest in the CAD/CAM systems

Limitations:
Expected market share may vary
NPV calculation is limited to the validity of the
company’s WACC