+1 (208) 254-6996 essayswallet@gmail.com
  

Finance Case Background Information. It is April 2022 and Cochran…  Finance Case Background Information. It is April 2022 and Cochran Industries is examining a new capital investment proposal. The proposal involves investment in a series of machines that would greatly increase the production of one of Cochran’s main products, S[1]cams. Company Background Cochran Industries was established in the early 1960s for the purpose of manufacturing and forging high quality steel products with a specialized niche in the production of custom forgings for the agricultural, construction, earth[1]moving equipment, and heavy brake industries. Cochran also developed a standard proprietary forged product line comprised of yokes and clevises manufactured to the Society of Automotive Engineer’s Specifications. Cochran has the advantage of in-house forging and heat-treating departments, which allowed the firm to develop a variety of innovative, forged products. Within a few years, the company was distributing forged products across the country. In the 1970s and 1980s, major suppliers of the trucking industry such as Bendix, Rockwell International, and Bristol began to out-source many components to independent forging companies such as Cochran Industries. The company entered into this new area by forging slack-adjusters, S-cams, and compressor crankshafts for the above-mentioned companies. In addition, Cochran Industries forged components for large construction equipment producers such as Caterpillar and John Deere. With this new influx of business, Cochran shifted its strategy away from its proprietary product line and focused attention on forging products for companies considered “heavy industry”. Thus, Cochran today is a supplier of forged components to numerous heavy industry manufacturers who prefer to sublet the forging and tooling parts of their production process. Investment Proposal Investment in S-cam machinery The proposal involves investment in group of machines that would greatly increase the firm’s ability to manufacture large quantities of S-cams. The purchase price of this machinery would be $1.05 million and installation costs would total $45,000. The S-cam equipment would have a useful life of 6 years, but for tax purposes, depreciation charges would be according to the 7-year MACRS class that applies for most industrial equipment (the amount to be depreciated is the sum of the machinery and installation costs). It is anticipated that the variable operating costs, excluding depreciation, will be approximately 55 percent of sales. In the project’s first year, incremental fixed costs (maintenance, etc.) are projected to be $92,000. In each of the remaining years, this fixed cost component is projected to increase by 2.4% over the preceding year. Interest charges associated with the financing of this investment have been estimated at approximately $39,000 per year, for each year of the project’s estimated useful life. Although no new administrators will be hired as a direct result of the S-cam project, Ed Sloan, the firm’s accountant, has suggested that the S-cam project should be assigned a pro-rata portion of the firm’s existing overall fixed administrative costs. Based on the project’s average revenue projections relative to that of the firm as a whole, he is suggesting an allocated charge of $31,000 per year. Ed also noted that the portion of the factory that would house this new S-cam machinery underwent a major ‘renovation’ last year with a total cost of $126,000. Because the S[1]cam project would not have been feasible without the renovation, Ed suggests that the costs of the renovation should be considered as one of the S-cam project’s initial expenses. In addition to the initial outlay for the S-cam machinery, the firm anticipates that it will have to make incremental working capital investments to parallel the expected changes in sales. Analysis has resulted in the estimate that a proper working capital requirement figure would be 8.3 percent of incremental sales (i.e., the NWC investment (or recovery) at time t will be 8.3% of the D in sales between time t, and t + 1). Management expects the machinery to be sold for a before-tax scrap value of $55,000 at the end of year 6. The revenue flows anticipated for this investment are shown in Exhibit 1.  EXHIBIT 1Sales projections relating to the S-cam machinery Year Sales ProjectionYear  1 $540,000 Year 2 $1,230,000 Year 3 $1,250,000 Year 4 $1,300,000Year 5 $825,000 Year 6 $800,000 Question:The CFO of Cochran Industries (Nolan Magid) requests your assistance in preparing an analysis of the net cash flow projections for the proposed investment in the new line of S-cam machinery. In particular, Nolan is interested in the Weighted Average Cost of Capital (WACC), net present value, IRR, and whether the project should be accepted or rejected. You have also been provided with the following information: • The firm has 2,150,000 shares of common stock outstanding that are trading for $14.75 per share. • Rf = 4.75% (risk-free rate) • b = 0.75 • Market risk premium = 6% • Average tax rate = 31.7% • Marginal tax rate = 35% • The firm’s bonds have 7.9% coupon rate, a $1,000 face value, pay semi-annual coupons, and mature in 12 years. There are 9,000 of these bonds outstanding that are currently selling in the open market for $996.25   7-year MACRS Schedule Year Depreciation Year 1 14.29% Year 2 24.49% Year 3 17.49% Year 4 12.49% Year 5 8.93% Year 6 8.92% Year 7 8.93% Year 8 4.46% If you could please help me out and provide answers in excel  Business Finance BUS F596

Don't use plagiarized sources. Get Your Custom Essay on
Top answer: Finance Case Background Information. It is April 2022 and Cochran…
Just from $10/Page
Order Essay

Order your essay today and save 10% with the discount code ESSAYHELP