274 Words2 Pages

EXHIBIT 14
Dixon Corporation
I. Estimate the Free Cash Flow (FCF) for the Collinsville Plant. The proforma statement is presented in Exhibit 8 of the case.
• Estimate the FCF for the period 1980 – 1984 or the period 1980 – 1989.
If you use the 10 year forecast, assume the net operating flows are constant from 1984 through 1989, that working capital does not change, i.e., it is zero; and property, plant and equipment (PPE) continues the same trend throughout the 10 year period. Also assume capital investment is $600,000 for the period 1985 through 1989 and assume the depreciation increases $60,000 annually for the period 1985-1989.
• Free Cash Flow = Net Operating Profits After Tax + Capital Investment + Change in Working Capital. An inflow of cash is a + and an outflow of cash is a -. The tax rate is .48 and NOPAT = NOP (.52). Capital Investment = change in PPE + depreciation expense, and change in working capital is the change in the three WC items between two years. That is, in 1979 NWC = $1400 and in 1980 NWC =$1196. Therefore, the cash flow related to working capital is an inflow of $204. That is working capital decreased, thereby creating an inflow of cash in 1980.
II. Justify the cost of capital used to discount the FCF.
III. Estimate the present value of the cost savings that result from the lamination process applied to the graphite electrodes. This is discussed at the bottom of page 3 of the case and the data are found in Exhibit 8.
IV. What is the value of the Collinsville plant?
V. Should Dixon purchase the Collinsville plant?

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