COMPASS MINERALS IS CONSIDERING MAKING A BID TO SUPPLY THE HIGHWAY DEPARTMENT WI

COMPASS MANAGEMENT BELIEVES THAT THE ACTUAL QUANTITY WILL AVERAGE 40,000 TONS PER Y
THE FIRM WILL NEED AN INITIAL INVESTMENT OF $2,300,000 IN NEW PROCESSING EQUIPMENT.
THE ACCOUNTING DEPARTMENT HAS ESTIMATED THAT ANNUAL FIXED COSTS WILL BE $500,000 AN
THE NEW EQUIPMENT WILL BE DEPRECIATED USING MACRS WITH AN EXPECTED LIFE OF 5 YEARS:
THAT IS: YEAR 1 = 20% YEAR 2 = 32% YEAR 3 = 19.2% YEAR 4 = 11.52% YEAR 5 = 11.52%
AT THE END OF THE PROJECT, YEAR 5, IT IS ESTIMATED THAT THE EQUIPMENT CAN BE SOLD FOR $1
COMPASS BELIEVES THAT THE STATE WILL CONTRACT AT A SELLING PRICE OF $125 PER TON, ALTHO
COMPASS ENGINEERING DEPARTMENT ESTIMATES THAT THE PROJECT WILL REQUIRE :
AN INITIAL NET WORKING CAPITAL INVESTMENT OF $115,000 (RECALL PIGNATARO: OPERATING WO
THE FIRM'S WACC (COST OF CAPITAL) IS 12% AND ITS MARGINAL TAX RATE IS 35%.
QUESTIONS:
A) SET UP A WORKSHEET CONTAINING ALL RELEVANT INFORMATION SHOWING BEFORE TAX AND A
WORKSHEET SHOULD SHOW ANNUAL CASH FLOWS FOR EACH YEAR, INCLUDING INITIAL OUTLAY, AN
B) COMPUTE THE NPV, IRR OF THIS PROJECT: IS THE PROJECT ACCEPTABLE FOR COMPASS MINERALS
C) THE STATE DECIDES TO OPEN THE PROJECT TO COMPETITIVE BIDDING,
WHAT IS THE LOWEST BID PRICE PER TON OF SALT THAT COMPASS CAN ACCEPT FOR ITS SHAREHOLD
D) DEVELOP THREE ONE-WAY DATATABLES; PRICE /TON, UNITS SOLD, VAR COST /TON TO DETERMIN
USE PERCENT CHANGE OF : -9%, -6%, -3%, 0%, +3%, +6%, +9% FROM THEIR RESPECTIVE BASE VALU
WHAT ARE YOUR OBSERVATIONS ? (GRAPH VERY HELPFUL)
E) CHOOSE THE TWO MOST CRITICAL VARIABLES OF THE THREE ANALYZED IN D) AND DEVELOP A TW
WHAT ARE YOUR OBSERVATIONS ? (CONDITIONAL FORMAT WHEREIN IRR < 12% VERY HELPFUL)

F) SCENARIO ANALYSIS: ASSUME COMPASS MANAGEMENT PROVIDE THE FOLLOWING ADDITIONAL

PROBABILITY 15%
PESSIMISTIC_CASE
PRICE/TON 118.75
UNITS SOLD (TONS) 38,000
VARIABLE COST/TON 89.30
OPEN A NEW WORKSHEET: USE THE EXCEL SCENARIO MANAGER TO COMPUTE NPV AND IRR FOR EA
THEN COMPUTE THE PROBABILTY WEIGHTED NPV AND IRR ; AND THE PROBABILITY WEIGHTED STA
FINALLY, ASSUMING A NORMAL DISTRIBUTION, WHAT IS THE PROBABILITY ( NPV < 0 ) ? AND PROBA

G) PERFORM A MONTE CARLO SIMULATION WITH 500 TRIALS TO DETERMINE THE EXPECTED NPV, E
THE UNCERTAIN VARIABLES AND THEIR PROBABILITY DISTRIBUTIONS ARE GIVEN BELOW.
THE QUANTITY OF SALT SOLD SHOULD BE SIMULATED FOR EACH YEAR INDEPENDENTLY OF OTHER Y
VARIABLE: DISTRIBUTION:
SALT SOLD TRIANGULAR; MIN = 25,000 MA
VARIABLE COST / TON NORMAL; MEAN = $95, STDEV =
SALVAGE VALUE OF EQUIP UNIFORM; MIN = $70,000 MAX =

WHAT ARE YOUR OBSERVATIONS ?

INPUT SUMMARY:
AMOUNT OF SALT PER YEAR 40,000 TONS
REVENUE PER TON $125
COST OF EQUIPMENT $2,300,000
LIFE OF PROJECT 5 YRS
MACRS 5 YRS
FIXED COST $500,000
VARIABLE COST/TON $94
TOTAL VARIABLE COST $3,760,000
ACTUAL SALVAGE VALUE $150,000
CHANGE IN NET WORKING CAPITAL (NWC) $115,000
REQUIRED RETURN 12%
TAX RATE 35%
 GHWAY DEPARTMENT WITH ROCK SALT TO DROP ON THE ROADS IN PORTLAND,ORE. DURING WINTER.
VERAGE 40,000 TONS PER YEAR.
OCESSING EQUIPMENT.
OSTS WILL BE $500,000 AND VARIABLE COST WILL BE $94 PER TON OF SALT SOLD.
PECTED LIFE OF 5 YEARS:
YEAR 5 = 11.52%
MENT CAN BE SOLD FOR $150,000
OF $125 PER TON, ALTHOUGH THE STATE MAY RECEIVE SOME LOWER BIDS.
ILL REQUIRE :
IGNATARO: OPERATING WORKING CAPITAL)
TE IS 35%.

OWING BEFORE TAX AND AFTER TAX CASH FLOWS OVER THE 5 YEAR PROJECTED PERIOD.
LUDING INITIAL OUTLAY, AND FINAL YEAR EQUIPMENT DISPOSAL.
E FOR COMPASS MINERALS ?

CCEPT FOR ITS SHAREHOLDERS ?

COST /TON TO DETERMINE IMPACT OF EACH ON THE PROJECT IRR.
HEIR RESPECTIVE BASE VALUE IN THE SPREADSHEET: YEAR 1

D IN D) AND DEVELOP A TWO-WAY DATATABLE

R < 12% VERY HELPFUL)

FOLLOWING ADDITIONAL INFORMATION: YEAR 1

70% 15%
BASE_CASE OPTIMISTIC_CASE
125.00 131.25
40,000 42,000
94.00 98.70
MPUTE NPV AND IRR FOR EACH CASE.
ROBABILITY WEIGHTED STANDARD DEVIATION NPV AND IRR.
Y ( NPV < 0 ) ? AND PROBABILITY ( IRR < 12% ) ? I.E., PROJECT ACCEPTABLE ?

MINE THE EXPECTED NPV, EXPECTED IRR AND THEIR RESPECTIVE STANDARD DEVIATIONS.
E GIVEN BELOW.
DEPENDENTLY OF OTHER YEARS (I.E., FIVE SEPARATE SIMULATIONS).

GULAR; MIN = 25,000 MAX = 50,000 MOST LIKELY = 40,000

AL; MEAN = $95, STDEV = $5
RM; MIN = $70,000 MAX = $200,000
ORE. DURING WINTER.