Question

Assume a 12% Discount Rate; Period 1 = .8929, Period 2 = .7972, Period 3 = .7118, Period 4 = .6355, Period 5 = .5674 etc.

Case Question 9-31 "Maybe I should have stuck with teaching high school art. No matter what I try, I can't seem to turn that Roanoke plant around." That's how the meeting between Warren Wingo, CEO of clothing manufacturer Wingo Designs, and Angie Tillery, vice president of corporate lending at First National Bank, ended. Wingo and Tillery had just concluded that the Roanoke plant was draining corporate cash flow and income, and should be closed on December 31, 2018 When he returned to his office, Wingo summoned corporate controller Ron Wright to tell him the bad news. "Ron, I wish there were some way to turn this situation around. We've had so many bad things happen lately-the fire in Lexington, the strike in Pulaski, and now this. Why didn't I stay at Cave Spring High?" Warren, it may not be as bad as it seems," Ron replied. "Let's put our heads together and do some investigating. We've got some great folks working here, and I bet if we asked them to think about it, they could come up with some options." With that encouragement, Warren sent Ron out to find some way of disposing of the Roanoke facility Early Monday morning, Ron ran into Warren's office waving a legal pad We've done it, Warren. We've got three good options for the Roanoke plant. One of them even has us keeping the plant." Warren listened intently as Ron laid out the three options his staff had developed: Option 1 Sell the plant immediately to Tinsley Togs for $9,000,000

Answer 1

Calculate cash flows for each year for each option as follows: в D А Timing 1 Option 1 $9,000,000 3 4 5 6 7 Year 0 Year 1 Year 2 Year 3 Year 4 Amount Option 2 0 $2.874,000 $2,874,000 $2,874,000 $4,874,000 Option 3 ($1,500,000) $1,600,000 $2,500,000 $3,400,000 $3,700.000 Calculate NPV under each option as follows: D C Amount Option 2 E PVF @ 12% A B Timing Option 1 Year 0 $9,000,000 Year 1 5 Year 2 6 Year 3 7 Year 4 8 Net Present Value $9,000,000 $2,874,000 $2,874,000 $2,874,000 $4,874,000 $10,000,378 Option 3 ($1,500,000) $1,600,000 $2,500,000 $3,400,000 $3,700,000 $6,693,110.00 0.8929 0.7972 0.7118 0.6355 F NPV Option 3 ($1,500,000) $1,428,640 $1,993,000 $2,420,120 $2,351,350 $6,693,110 Calculate values in above table as follows: в DEF Timing Amount PVF @ 12% NPV Option 1 Option 2 Option 3 Option 3 Year 0 90000000 - 1500000 1 =D3*E3 Year 1 2874000 1600000 0.8929 =D4%E4 Year 2 2874000 2500000 0.7972 =D5 E5 Year 3 2874000 3400000 0.7118 =D6*E6 Year 4 4874000 3700000 0.6355 =D7%E7 8 Net Present Value 9000000 =NPV(12%,C4:C7)+C3 6693110 =F3+F4+F5+F6+F7