Baldwin

Investment Policy y Baldwin Case: Practice

Corporate Finance
Hong Kong University of Science & Technology
Instructor: Peter MacKay

Baldwin C
B ld i Company (Chapter 8)
(Ch t
New line of bright-colored bowling balls.
Ran a $250,000 test market study last year.
$250 000 test-market year Would use a vacant $150,000 warehouse.
$ ,
Cost of bowling ball machine is $100,000.
Its salvage value ≈ $30,000 in year 5.
Price h ld
P i should grow 2% each of 5 years. h f
Costs should grow 10% each of 5 years.
2

Baldwin: Pl
B ld i Plan of Analysis fA l i
Identify th l
Id tif the relevant cash flows related to: t h fl l t dt
F
FCF

Capital Expenditures (CAPEX)
Change in Net Working Capital (∆NWC)
Operating Cash Flow (income statements)

Discount each year’s free cash flow (FCF)
Find
Fi d NPV b summing di by i discounted FCFs t d FCF
Accept or reject the project
3

Baldwin:
B ld i CAPEX & ∆NWC
1

2
3
4
5
6

Incremental Cash Flows
Capital Spending:
Test marketing study (sunk cost)
Bowling ball machine
Depreciation rate (IRS not FASB)
Fiscal depreciation (also in income)
Accumulated fiscal depreciation
Non-depreciated value (tax basis)
Tax owed by/to Baldwin on disposal
Routine
R i machine maintenance hi i
Warehouse (opportunity cost)
Total Capital Spending Cash Flow:
Change in Net Working Capital:

7 Total Investment Cash Flows:

Year:

0

250

1

n/a
-100

20.0%
20.00
20.00
80.00
34%
0.00
0.00
0 00
-150
0.00
0.00
1+2+3+4 -250
-10
10
0.00
0 00
5+6

-260

0.00

2

32.0%
32.00
52.00
48.00
0.00
0.00
0 00
0.00
0.00
-6.32
6 32

3

19.2%
19.20
71.20
28.80
0.00
0.00
0 00
0.00
0.00
-8.65
8 65

-6.32 -8.65

4

5

11.5%
11.52
82.72
17.28
0.00
0.00
0 00
0.00
0.00
3.75
3 75

30.00
11.5%
11.52
94.24
5.76
-8.24
0.00
0 00
150.00
171.76
21.22
21 22

3.75 192.98

4

Baldwin:
B ld i CAPEX & ∆NWC
1

2
3
4
5
6
7