The Lazy Mower: Is It Really Worth It

1052 Words Apr 22nd, 2012 5 Pages
Solution to Case 03

Cash Flow Analysis

The Lazy Mower: Is it really worth it?

Questions:

1. Prepare a Pro Forma Statement showing the annual cash flows resulting from the Lazy Mower project.

(See table on next page)

| |0 |1 |
|Base | $ 46,162,736.36 |60.806% |
|Pessimistic | $ 36,143,876.79 |51.733% |
|Optimistic | $ 60,917,016.49 |74.153% |

3. Realizing that the CIC will demand some kind of sensitivity analyses, how should Dave and Rick prepare their report? Which variables or inputs are obvious ones that
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Any sales above that point will result in profit for the year. Since the annual sales forecasts are considerably higher than this level the project seems acceptable. However, the cost of capital is not accounted for by the accounting break-even.

Cash Break-Even = Fixed Cost/(Price-Variable Cost) = $1,620,000/$600 = 2,700 mowers

Without including depreciation costs, the firm would need to sell only 2,700 mowers to break even i.e. to cover its fixed operating costs. At this point the operating cash flow would be zero. Cash-break even does not account for the cost of the project nor the cost of capital.

Financial Break-Even = (Fixed Costs + Operating Cash Flow*) (Price – Variable Cost)

Where Operating Cash Flow* = Level of Cash flow that results in a zero NPV

| | | |
|OCF* | |$3,790,003.98 |
|Initial Outlay(including NWC) | $(20,900,000.00) |
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