Murray Parts is a distributor of automotive spare parts for dealers and repair s
ID: 2448021 • Letter: M
Question
Murray Parts is a distributor of automotive spare parts for dealers and repair shops. They are considering a launch of an online sales initiative directly to do-it-yourself (DIY) consumers.
The marketing department invested an additional 100,000 dollars to enable online orders as part of a website upgrade that is nearing completion. The time horizon for projected cash flows is three years and the post Year 3 perpetuity is described as Year 4+. The table below shows some of the projections (incremental revenue, COGS, transportation costs, and working capital) anticipated for this initiative in thousands of dollars.
Murray needs warehouse space and staff for the handling and packing of online orders. To do so, they would discontinue the current kitting and packaging operations they have been providing for parts retailers and use the warehouse space and workers for the online business instead. The kitting and packaging operation consistently provides annual revenues of 200,000 dollars and requires 120,000 dollars in warehouse labor. Assume the tax rate is 40% and the discount rate for Murray Parts is 10%. Ignore inflation.
(a) Which of the following items are relevant cash flows for the online sales initiative?
A: Annual 200,000 revenue from kitting operations for parts retailers
B: Annual 120,000 in operations labor that would move from kitting operations to online orders
C: 100,000 in website enhancements for online orders
D: None of these are relevant cash flows
(b) What is the projected EBITDA for year 1 in thousands of dollars?
An important aspect of this initiative is the Net Working Capital Investment. Remember that this is the number subtracted from NOPAT in the FCF formula, so a working capital investment would be a POSITIVE number and a reduction in working capital required would be a NEGATIVE number.
Given the initial requirements of 50,000 in Inventory and 30,000 in Accounts Payable...
(c) What is the initial Net Working Capital Investment required for this initiative?
Now consider the Year 1 requirements of 50,000 in Accounts Receivable, 140,000 in Inventory and 80,000 in Accounts Payable. Given your calculation of the initial Net Working Capital Investment in the previous question...
(d) What is the Net Working Capital Investment required for Year 1 in thousands of dollars?
Considering the Free Cash Flows through Year 3 and adding a Terminal Value based on the perpetuity (Year 4+) Free Cash Flows to the Year 3 Free Cash Flow...
(e) What is the NPV for online sales initiative in thousands of dollars?
Explanation / Answer
a)RELEVANT CASH FLOW FOR ONLINE SALES INITIATIVE ANSWER IS A:REVENUE FROM KITTING OPERATIONS AS OPERATION LABOUR PREVIOUSLY USED FOR KITTING OPERATION WILL NOW BE USED FOR ONLINE ORDERS AND IS NOT AVOIDED.AMOUNT INVESTED FOR WEBSITE ENHANCEMENT IS A PART OF WEBSITE UPGRAGE NEARING COMPLETION
(b) PROJECTED EBITDA FOR YEAR 1 IS =REVENUE-COGS-TRANSPORTATION COST=(500-400-50)THOUSANDS OF DOLLARS=50 THOUSANDS OF DOLLARS
(c)INITIAL NET WORKING CAPITAL INVESTMENT REQUIRED
WORKING CAPITAL=CURRENT ASSETS-CURRENT LIABILITY=INVENTORY-ACCOUNTS PAYABLE
=$50,000-$30,000
=$20,000
WORKING CAPITAL REQUIREMENT IN YEAR 1=ACCOUNTS RECEIVABLE+INVENTORY-ACCOUNTS PAYABLE
=$50,000+$1,40,00-$80,000=$1,10,000
(e)CALCULATION OF NPV FOR ONLINE SALES INITIATIVE
CALCULATION OF FREE CASH FLOWS
AMOUNTS IN THOUSANDS OF DOLLARS
CALCULATION OF CHANGE IN WORKING CAPITAL
AMOUNTS IN THOUSANDS OF DOLLARS
CALCULATION OF PRESENT VALUE OF FREE CASH FLOWS
AMOUNT IN THOUSANDS OF DOLLARS
PRESENT VALUE OF CASH FLOW OF 4+ YEAR=$1,68,000*0.751=$1,26,168
NPV FOR ONLINE SALES INITIATIVE=$45,642+$1,26,168=$1,71,810
NOTE :DEPRECIATION IS NOT GIVEN HENCE IGNORED
YEAR 0 1 2 3 4+ REVENUE 500 800 2,000 2,000 LESS:COGS 400 640 1,600 1,600 LESS:TRANSPORTATION COST 50 70 120 120 EBITDA 50 90 280 280 LESS:TAX @40% 20 36 112 112 EARNING AFTER TAX 30 54 168 168 LESS:CHANGE IN WORKING CAPITAL(CALCULATED BELOW) 90 40 50 0 FREE CASH FLOW (60) 14 118 168Related Questions
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