Dixon Case Study

Pro Forma Income Statement

The incremental cash flow is calculated under following assumptions:

1. The total sales of sodium chlorate will increase 3000 tons per year and to a maximum of 38000 tons. The price of sodium chlorate will increase 8% annually.

2. Variable cost such as power and salt will increase accordingly with the sales of sodium chlorate.

3. Labor cost will increase 10% annually. Maintenance cost will increase 8.5% annually. Other cost will remain stable.

4. Depreciation will increase because of new capital expenditure.

5. The marginal tax rate is 48% according to historical data.

Moreover, if Collinsville Plant uses the new laminate technology, it will save 15% on power costs and eliminate graphite costs. The upfront expenditure of the new technology is 2.25 million. (Appendix 1)

Weighted Average Cost of Capital

To get WACC, we need rd and re. rd is 11.25%, the interest Dixon needs to pay every year for financing the Collinsville Plant. Meanwhile, we get re from two comparable companies, Brunswick and Southern, which are specialized in producing sodium chlorate. Since both peer companies have debts, we first need to get the unlevered return of the industry, 16.86%. Then, we re-levered it to the Collinsville Plant according to its own Debt-to-Equity ratio (D/E ratio). Since Dixon will raise large debt to increase its leverage and pay back the debt within 7 years by 1 million per year according to pre-determined repayment schedule, Collinsville Plant will have different D/E ratio and WACC each year, which means we need market value of equity and market value of debt every year. We use the average PE ratio of peer companies to estimate the market value of equity each year. By using debt outstanding and the market value of equity, we can get an estimated leverage every year and then have WACC each year.(Appendix 2)

Valuation of Collinsville Plant

APV method is used to calculate the value of Collinsville Plant under old technology. The conservative present value of operating asset is 8.32 million and the present value of interest tax shield is 1.39 million. NPV of Collinsville Plant is -2.29 million.

NPV of laminate technology is 4.59 million. This technology will bring NPV of Collinsville Plant from -2.29 million to 2.3 million.

Economic Benefits

After our research, we find out that Collinsville Plant is profitable only if Dixon use laminate technology. The laminate technology will bring nearly 4.59 million NPV to the plant, which will enable the plant to bring NPV of 2.3 million to Dixon Corp. The value laminate technology increases in are improvement