Louisville Slugger The Louisville Slugger baseball bat began over 120 years ago in the talented hands of 17-year-old John A. “Bud” Hillerich. Bud, whose father owned a woodworking shop, left work one afternoon to watch Louisville’s major league team, the Louisville Eclipse, and his favorite player, Pete Browning. During the game, Browning, who was struggling through a long hitting slump, broke his bat. Following the game, Bud met Browning and invited him to his father’s shop to make him a new bat. With Browning’s assistance, Bud handcrafted a new bat for Browning from a single piece of wood.
Browning got three hits with it the next day and the “Louisville Slugger” was born. Since that time, baseball legends like Babe Ruth and Lou Gehrig to modern-day greats like Alex Rodriguez and Derek Jeter have all swung Louisville Sluggers. Sixty percent of all Major League Baseball players’ bat of choice is a Louisville Slugger. It is the official bat of Major League Baseball. Over the last 120 years, the game of baseball, and Louisville Slugger for that matter, has changed dramatically. 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 equipment. One of the major revenue-producing items manufactured by Louisville Slugger is its TPX Warrior aluminum bat. In fact, the Warrior was the official bat of multiple college baseball national championship teams.
However, technology changes rapidly and the needs of baseball players across the world are not the same today as they were five years ago. As a result, Louisville Slugger has decided to try and create a new, revolutionary aluminum bat that it hopes will make the TPX Warrior a thing of the past. Louisville Slugger spent $6,000,000 to develop a new model, which has many of the features of the Warrior, except for twice the strength. This is due to the use of ST+20 alloy, carbon composite inserts, and an internal carbon composite sleeve. The company named this prototype the TPX Exogrid.
Further, the company spent $350,000 for a financial consultant to determine whether the new bat was feasible and whether it would be profitable. If the TPX Exogrid model is introduced, production of the existing TPX Warrior will be terminated in three years. 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 sales.
Due to Louisville Slugger’s brand power, facilities, and long history of success, the company can manufacture the Exogrid at a lower cost than it would cost most other baseball bat companies. Louisville Slugger can produce the Exogrid for $145 each in variable costs and estimated fixed costs of $3 million per year. According to Louisville Slugger’s marketing study, which cost the company $225,000, the company’s estimated sales volume in Exogrid bats for the next six years may be seen by the chart below: |YEAR |SALES VOLUME | |Year 1 |75,000 | Year 2 |125,000 | |Year 3 |50,000 | |Year 4 |90,000 | |Year 5 |80,000 | |Year 6 |65,000 | Louisville Slugger expects to sell the Exogrid for $350 per bat for the first three years and a discounted $300 per bat for Years 4, 5, and 6. 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. 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 project.