Reference no: EM13929903
The questions on this exam are adapted from the Case: Performance Lawn Equipment in Business Analytics by Evans. The accompanying data was modified to fit the goals and objectives of this exam.
Performance Lawn Equipment
Company Background Information
PLE, headquartered in St. Louis, Missouri, is a privately owned designer and producer of traditional lawn mowers used by homeowners. In the past 10 years, PLE has added another key product, a medium-size diesel power lawn tractor with front and rear power takeoffs, Class I three-point hitches, four-wheel drive, power steering, and full hydraulics. This equipment is built primarily for a niche market consisting of large estates, including golf and country clubs, resorts, private estates, city parks, large commercial complexes, lawn care service providers, private homeowners with five or more acres, and government (federal, state, and local) parks, building complexes, and military bases. PLE provides most of the products to dealerships, which, in turn, sell directly to end users. PLE employs 1,660 people worldwide. About half the workforce is based in St. Louis; the remainder is split among their manufacturing plants.
In the United States, the focus of sales is on the eastern seaboard, California, the Southeast, and the south central states, which have the greatest concentration of customers. Outside the United States, PLE's sales include a European market, a growing South American market, and developing markets in the Pacific Rim and China. The market is cyclical, but the different products and regions balance some of this, with just less than 30% of total sales in the spring and summer (in the United States), about 25% in the fall, and about 20% in the winter. Annual sales are approximately $180 million.
Both end users and dealers have been established as important customers for PLE. Collection and analysis of end-user data showed that satisfaction with the products depends on high quality, easy attachment/dismount of implements, low maintenance, price value, and service. For dealers, key requirements are high quality, parts and feature availability, rapid restock, discounts, and time lines of support.
PLE has several key suppliers: Mitsitsiu, Inc., the sole source of all diesel engines; LANTO Axles, Inc., which provides tractor axles; Schorst Fabrication, which provides subassemblies; Cuberillo, Inc., supplier of transmissions; and Specialty Machining, Inc., a supplier of precision machine parts.
Spreadsheet Modeling and Analysis(20 points)
As part of the company's continues commitment to product innovation, the Executive Committee of PLE is debating whether to replace its original tractor model, the PLE-Classic, with a new model, the PLE-Tough, which would appeal to a younger clientele. Whatever tractor chosen will be produced for the next 4 years, after which time a reevaluation will be necessary. The PLE-Tough has passed through the concept and initial design phases and is ready for final design and manufacturing. Final development costs are estimated to be $750,000, and the new fixed costs for tooling and manufacturing are estimated to be $6 million. The PLE-Tough is expected to sell for $4,200. The first year sales for the PLE-Tough is estimated to be 4,000, with a sales growth for the subsequent years of 6% per year. The variable cost per vehicle is uncertain until the design and supply-chain decisions are finalized, but is estimated to be $2,300. Next-year sales for the PLE-Classic are estimated to be 3,800, but the sales are expected to decrease at a rate of 10% for each of the next 3 years. The selling price is $3,800. Variable costs per vehicle are $2,140. Since the model has been in production, the fixed costs for development have already been recovered.
a. Develop a 4-year financial model to recommend the best decision using a net present value discount rate of 10%. Include the discount rate as an input variable in your model. Use the following layout for your financial model. Paste a screenshot of your model here.
Financial Model
Year 1 Year 2 Year 3 Year 4
First Year Sales
Sales Volume Growth Rate
Annual Sales
Revenue
Total Variable Cost
Net Profit
Net Present Value