Road king trucks - assessment project

Assignment Help Project Management
Reference no: EM13974573

The attached file is a spreadsheet that is only for "Example" purposes – if needed.?
Road King Trucks - Assessment Project


The Transit Bus Opportunity
The company currently builds trucks and is considering building buses. A cost assessment should be done to see if the bus manufacturing will be at a reasonable cost.

Company Profile
The company starting manufacturing school buses and account for about 50% of Road King Trucks' revenues.

The Decision
Management presented the sales and cost forecasts shown in the Exhibits below. The information presented contains the cost of production, financing information, and warranty cost estimates. The proposals also contained two engine options for the engines: The Detroit engine, and the Marcus engine.

The Detroit engine was more expensive to install, but had a lower warranty cost.
The Marcus engine was less expensive to install, but had a higher warranty cost.
Which engine should be used?

Issues and Analyses
Management feels the transit bus project will be a great opportunity but an analysis and report needs to be produced for the proposed project.

Exhibit 1: Sales and Cost Forecast
The sales forecast is based on projected levels of demand. All the numbers are expressed in today's dollars.

The forecasted average inflation per year is 3.5%

Price per Bus $220,000
Units sold per year 11,000
Labor Cost per Bus $50,000
Components & Parts per Bus $95,000
Selling General & Administrative (fixed) $250,000,000
NOTE: Average warranty cost per year per bus for the first five years is $1,000. The present value of this cost will be used as a cost figure for each bus. Afterwards, the bus operator will become responsible the repairs on the buses.

The buses can be produced for twenty years. Afterwards, the designs become obsolete.

Two Engine Choices:

Engine Detroit Engines Marcus Engines
Price per engine, including installation $20,000 $18,000

Average annual warranty cost per year for five years. Afterwards, the bus operator will become responsible for the repairs on the buses*
$1,000 $1,500
The chosen engine will be installed in every bus and will become a cost figure for each bus.

NOTE: The engine manufacturers are not providing Road King Trucks with any warranty. Road King Trucks will provide a warranty to its customers. After the initial five years, the bus operators may purchase an extended warranty from any insurance company that offers such packages.

Exhibit 2 - Investment Needs

To implement the project, the firm has to invest funds as shown in the following table:

Year 0 Year 1 Year 2
$1 Billion* $100 Million* $100 Million*

* Road King Trucks estimated that it would cost a total of $1 billion to build the factory and purchase the necessary equipment to produce the buses. The other $200 million investment, divided equally in years
1 and 2 is for non-depreciable labor training costs.

Such investment is treated as regular business expenses.

Straight line depreciation will be used for the sake of simplicity.

To facilitate the operation of manufacturing the transit buses, the company will have to allocate funds to net working capital (NWC) equivalent to 10% of annual sales. The investment in NWC will be recovered at the end of the project.

The equipment will be sold for salvage at about $15,000,000 at the end of the project.

Exhibit 3: Financing Assumptions

The following assumptions are used to determine the cost of capital.

Historically, the company has maintained a debt ratio is 40%. This ratio was used, because lowering the debt implies giving up the debt tax shield, and increasing it makes debt service a burden on the firm's cash flow. In addition, increasing the debt level may cause a reduced rating of the company's bonds. The marginal tax rate is 40%. All the numbers are expressed in today's dollars. The forecasted average inflation per year is 3.5%.


Cost of debt:
The company's bond rating is roughly at the high end of the A range. Surveying the debt market yielded the following information about the cost of debt for different rating levels:

Bond Rating AA A BBB
Interest Cost 5.5% ~ 6.5% 6.25% ~ 7.5% 7.5% ~ 9%

The company's current bonds have a yield to maturity of about 6.5%.

Cost of equity:
The current 10-year Treasury notes have a yield to maturity of 2.25% and the forecast for the S&P 500 market premium is 8.75%. The company's overall beta is 1.15.

The assignment


I. Below is a list of items that is needed to identify and quantify:
See attached spreadsheet for examples

A. For Each Year
1. Revenue
2. Variable costs
a. Labor cost per bus
b. Parts cost per bus
c. Engine costs per bus (2 options Detroit Engines or Marcus Engine)

3. Selling, General & Administrative costs
4. Training costs
5. Warranty costs
a. Bus
b. Engine (2 options)
6. Depreciation
7. Working Capital needs


B. Project Related
1. Investment costs


C. Cost of Capital See attached spreadsheet example
1. Company's weighted average cost of capital (WACC) see Exhibit 3

2. Appropriate cost of capital for this project


II. Include a spreadsheet containing all relevant calculations and answers to these 7 questions based from the Exhibit information above.
See attached spreadsheet for Cash Flow and Cost of Capital examples


1) How much importance should be given to the energy cost situation?
2) What are the project's cash flows for the next twenty years? What assumptions did you use?

3) What is the company's cost of capital? What is the appropriate discount factor (which may be different) for you to use in evaluating the bus project?

4) If you decide to go ahead with the project, which of the two engines should be used in the bus, and why?

5) Evaluate the quality of the project, by using appropriate capital budgeting techniques.

6) Would you recommend that Road King Trucks accept or reject the project?
What are the key factors on which you base your recommendation?

7) Should the company do or not do the bus production project? What is the appropriate support for the decision (think NPV and IRR).


Attachment:- wacc-inputs-cash-flow-examples.xlsx

Reference no: EM13974573

Questions Cloud

What is the implicit interest rate in these cash ?ows : Suppose you enter into a short 6-month forward position at a forward price of $60. What is the payoff in 6 months for prices of $50, $55, $60, $65, and $70? Suppose you buy a 6-month put option with a strike price of $60. What is the payoff in 6 mont..
What is the current share price : Bayou Okra Farms just paid a dividend of $2.65 on its stock. The growth rate in dividends is expected to be a constant 4.5 percent per year indefinitely. Investors require a return of 15 percent for the first three years, a return of 13 percent for t..
What was the rate of return on this investment : Calculating the Number of Periods. Calculating Rates of Return. In 2011, an 1880-O Morgan silver dollar sold for $13,113. What was the rate of return on this investment?
What is the aftertax cash flow from the sale of this asset : Consider an asset that costs $730,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $192,000. If the relevant tax rate is 40..
Road king trucks - assessment project : Road King Trucks - Assessment Project, The Transit Bus Opportunity. The company currently builds trucks and is considering building buses. A cost assessment should be done to see if the bus manufacturing will be at a reasonable cost.
How many houses of each type should domar build : Domar properties plc have a site covering 20,000m2 on which they wanted to build a mixed estate of 2- & 4-bedroom houses. The 2-bedroom houses will each occupy a plot of 60m2 and will be sold at a profit of $15,000. How many houses of each type shoul..
Cobol assignment : For this program you will use a file INFILE (listed here in numbers) that has information about students and their grades on 4 exams. The input file is shown below:
What would happen to interest rates and bond prices : One-year zero coupon treasury bonds are selling for £975.61 in the U.K. and for $963.86 in the U.S. Assume $1,000 face value in dollars for the U.S. bond and £1,000 face value for the U.K bond, and round interest rates to two decimal places, e.g. 2.5..
Sales under the percent-of-sales forecasting method : A firm has targeted a 40% growth in sales this year. Last year's cash as a percent of sales was 15%, accounts receivable 30%, and inventory 35%. What percentage growth in current assets is required to support the growth in sales under the percent-of-..

Reviews

Write a Review

Project Management Questions & Answers

  Create a project schedule and align resources

Create a project schedule and align resources, Analyze project schedule and resource allocation

  Managerial roles and gap analysis

Write a report on Managerial Roles and Gap Analysis

  Questionaire on project management

Questionaire on Project Management

  Describe the market growth rate for product

Describe the market growth rate for product and service.

  Prepare a work plan and project schedule - gantt chart

Design an online system for the human resources department to manage available job positions.

  Project risk management approach

How does a project risk management approach pro-vide an early warning signal for impending problems or issues

  Black-scholes options pricing model

Calculate the payoff and the profits for investments

  Describe the features or characteristics of product

Describe the features or characteristics of your product or service.

  Write paper on inventory management system

Write paper on Inventory Management System.

  Analysis of the overall project risk

Analysis of the overall project risk

  Investment and performance analysis

Evaluate the usefulness of ROCE

  Distribution strategy and project management

Distribution strategy and project management

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd