Posted: September 11th, 2023

Finance Case 2: 50 points Jack Tar, CFO of Sheetbend & Halyard, Inc

Finance Case 2: 50 pointsJack Tar, CFO of Sheetbend & Halyard, Inc., opened the company confidentialenvelope. It contained a draft of a competitive bid for a contract to supply duffel canvasto the U.S. Navy. The cover memo from Sheetbend's CEO asked Mr. Tar to review thebid before it was submitted.The bid and its supporting documents had been prepared by Sheetbend's sales staff. Itcalled for Sheetbend to supply 100,000 yards of duffel canvas per year for 5 years. Theproposed selling price was fixed at $35 per yard.Mr. Tar was not usually involved in sales, but this bid was unusual in at least tworespects. First, if accepted by the navy, it would commit Sheetbend to a fixed price,long-term contract. Second, producing the duffel canvas would require an investment of$2.8 million to purchase machinery and to refurbish Sheetbend's plant in Pleasantboro,Maine.Mr. Tar set to work and by the end of the week had collected the following facts andassumptions:• The plant in Pleasantboro had been built in the early 1900's and is now idle. ThePlant was fully depreciated on Sheetbend's books, except for the purchase cost of theland (in 1947) of $10,000.• Now that the land was valuable shorefront property, Mr. Tar thought the land and theidle plant could be sold, immediately or in the near future, for $600,000.• Refurbishing the plant would cost $800,000. This investment would be depreciated fortax purposes on the 10-year MACRS schedule.• The new machinery would cost $2 Million. This investment could be depreciated onthe 5-year MACRS schedule.Therefurbished plant and new machinery would last for many years. However, the•remaining market for duffel canvas was small, and it was not clear that additionalorders could be obtained once the navy contract was finished. The machinery wascustom-built and could be used only for duffel canvas. Its secondhand value at theend of 5 years was probably zero.• The Staff's forecasts of income from the navy contract is detailed below. Mr. Tarreviewed this forecast and decided that its assumptions were reasonable, except thatthe forecast used book, not tax, depreciation.• But the forecast income statement contained no mention of working capital. Mr. Tarthought that working capital would average about 10% of sales.Armed with this information, Mr. Tar constructed a spreadsheet to calculate the NPV ofthe duffel canvas project, assuming that Sheetbend's bid would be accepted by thenavy.He had just finished debugging the spreadsheet when another confidential envelopearrived from Sheetbend's CEO. It contained a firm offer from a Maine real-estatedeveloper to purchase Sheetbend's Pleasantboro Land and plant for $1.5 million incash.Mr. Tar had the following information to determine the company's Weighted AverageCost of Capital which he intended to use at the discount rate for this analysis:• Sheetbend's only debt was 10,000, 30 year bonds issued at a price of $950 with acoupon rate of 5%.• Retained Earnings on Sheetbend's balance sheet was $500,000.• Sheetbend had 1,000,000 shares outstanding of company stock currently selling at$15 per share.• Sheetbend's Beta was estimated at .8• The Risk Free Rate was 2%• The expected return of the Market was 11%Should Mr. Tar recommend submitting the bid to the navy at the proposed price of $35per year? or Should Mr. Tar recommend the company pursue it's next best alternative?Please prepare a memo to Sheetbend's CEO with a recommendation providingsupporting information on all aspects of your analysis.Sales Department's Financial Projection provided with BidInflation($000)4%12345100100100100100Unit price$35.00$35.00$35.00$35.00$35.00Revenue$3500$3500$3500$3500$3500Cost of GoodsSold$2100$2100$2100$2100$2100Operating CashFlow$1,400$1,400$1,400$1,400$1,400Depreciation$480$480$480$480$480Income$920$920$920$920$920Tax @ 35%$322$322$322$322$322Net Income A/T$598$598$598$598$598Units Sold (000)Notes:1. Yards sold and price per year would be fixed by contract2. Cost of Goods includes $300,000 of fixed costs and $18 per yardof variable costs.3. Costs are expected to increase at an annual inflation rate of 4%4. The $2 Million of Machinery is depreciated straightline over 5years ($400,000 per year) and the $800,000 refurbishing of the plantis depreciated straight-line over 10 years ($80,000 per year)

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