Reference no: EM132444202

Rusty is a maker of custom high performance surfboards.  He has successfully branched out into clothing.  Recently one of his largest competitors, Channel Islands Surfboards, was acquired by Burton Snowboards.  Rusty believes that the potential of combining snowboard technology along with surfboards could significantly change the surfboard industry.  He has recently been approached by a snowboard company to develop a line of snowboards. 

Rusty's initial capital investment will be as follows:

Tenant Improvements:               $500,000

Equipment:                                           $250,000

Computers, software, networking:         $  25,000

Vehicles:                                               $  50,000

He estimates his on-going costs to be:

Cost of goods Sold (Variable Costs)

Materials                                              35% of revenues

Production Labor                                 $450,000 per year

Sales, general and administrative (Fixed costs)

Sales personnel                                     $300,000

Travel & Entertainment             $150,000

Promotional Events                               $300,000

Team Costs and Sponsorships  $400,000

Administrative expenses                        $150,000

Rent                                                     $  75,000

Miscellaneous expenses                        $100,000

Given the current economy Rusty believes that he will not be forced to pay higher fixed and variable costs during the second year of operations.  (The salary figures include salaries plus all other personnel costs.)  Rusty does not believe in hire and then fire so he established a policy of keeping the production people employed during the slow season.

Rusty hopes to produce three separate models: the R1 is an intro board and costs $350.  The R2 is an intermediate board and costs $450 and the R3 is an advanced board and costs $600.

The projected sales volumes are as follows:

                        Year 1                          Year 2

R1                    4,250                           4,250

R2                    3,700                           3,700

R3                    2,400                           2,400

Total              10,350                         10,350

Please note that 75% of all sales come from January through March and then October through December.  These sales are evenly allocated during these two three month periods. 

The remaining 25% of sales are evenly allocated during the April through September time period.

Given the current economy Rusty does not forecast a price increase for the boards during the first two years of operations

Project the pro-forma cash flow statement for Rusty's snowboard venture.

When does the breakeven occur?

What is the NPV if Rusty's cost of capital is 20%?

What is the NPV if Rusty's cost of capital is 10%? Should he go forward?

How do we take into account any effects the new snowboard technology may have on Rusty's surfboard business?  (A short written answer is appropriate.)