Louisville Slugger Case Study

859 Words 4 Pages
Register to read the introduction… What began as a wooden bat company has evolved into a company that manufactures both wood and aluminum bats, gloves, helmets, and other accessories. This evolution is largely due to an increase in performance technology, particularly in the production of aluminum bats. Since the company’s beginning, Louisville Slugger has always employed the most powerful technology available in the business mostly because of its strong research and development teams and significant investments in production …show more content…
The company will continue to manufacture the Warrior for three more years because the company still expects to profit from sales of the Warrior and the company estimates that the Warrior’s technology will not be outdated until that time. If Louisville Slugger introduces the Exogrid, sales of the Warrior will fall by 17,000 bats per year. Further, the current cost of the Warrior at $200 will have to be lowered to a discounted rate of $125 per bat. Variable costs of the Warrior are $70 each and the fixed costs for the Warrior are $2,150,000 per year. If Louisville Slugger does not introduce the Exogrid, the Warrior’s estimated sales will be 75,000, 65,000, and 45,000 bats for the next three years, respectively. Net working capital for the Exogrid will be 20 percent of sales and will occur in each individual cash flow year. For example, there will be no initial outlay for net working capital and changes in net working capital will first occur in Year 1 with its respective …show more content…
The cost of the equipment to manufacture the Exogrid is $25 million and will be depreciated on a seven-year MACRS schedule. The value of the equipment used to manufacture the Exogrid in six years will be $3.5 million. Louisville Slugger has a 40 percent corporate tax rate and a 12 percent required return. You are employed in Louisville Slugger’s finance department and are head of the capital budgeting team. The CEO of Louisville Slugger has asked you to prepare a brief report on the profitability of producing the Exogrid. In particular, the CEO would like to know the net present value, internal rate of return, profitability index, payback period, and discounted payback period of the Exogrid capital budgeting

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