1, 2019 Problem 4 You have an internship at Masan Food and are asked to analyze a capital budgeting case where the company wants to add a new type of fish sauce "Chin-su the King to its product mix. The following information about the product is estimated by Masan's financial manager and passed on to you: Project life: 3 years The production would need to use currently available, existing machinery of the company. The company spent $10,000 last year to renovate this machinery (for some repainting and maintenance). If the machinery is not used for this project, Masan would consider it for one of the following options Option 1: Sell it now for $180,000 cash Option 2. Lease it on a 5-year contract for $45,000 (after-tax) each year, starting one year from now. After 5 years of being leased, the machine would have no value to the company. If the company decides to use the machinery for this project, it would be depreciated according to a 3-year property MACRS schedule. At the end of the project life, it could be sold as scrap for $ 15,000 The project requires an initial investment in working capital of $15,000, which is fully recovered upon closure of the project This project "Chin-su the King' is expected to generate sales of 1.450 bottles per year at a cost of $120 per bottle in the first year, excluding depreciation. Each bottle can be sold for $200 in the first year. The sales price and cost are expected to increase by 10% per year due to inflation. The company takes a bank loan to finance the project, and is expected to pay $2,500 as interest expense per year over the life of the project. The company's tax rate is 35%, and its overall cost of capital (WACC) is 10%. Please refer to this MACRS schedule for depreciation schedule: Property Class Year 3-year 5-year 7-year 1 33.33% 20.00% 14.29% 2 44.45% 32.00% 24.49% 3 14.81% 19.20% 17.49% 4 7.41% 11.52% 12.49% 5 11.52% 8.93% 6 5.76% 8.92% 7 8.93% . . 1, 2019 Problem 4 You have an internship at Masan Food and are asked to analyze a capital budgeting case where the company wants to add a new type of fish sauce "Chin-su the King to its product mix. The following information about the product is estimated by Masan's financial manager and passed on to you: Project life: 3 years The production would need to use currently available, existing machinery of the company. The company spent $10,000 last year to renovate this machinery (for some repainting and maintenance). If the machinery is not used for this project, Masan would consider it for one of the following options Option 1: Sell it now for $180,000 cash Option 2. Lease it on a 5-year contract for $45,000 (after-tax) each year, starting one year from now. After 5 years of being leased, the machine would have no value to the company. If the company decides to use the machinery for this project, it would be depreciated according to a 3-year property MACRS schedule. At the end of the project life, it could be sold as scrap for $ 15,000 The project requires an initial investment in working capital of $15,000, which is fully recovered upon closure of the project This project "Chin-su the King' is expected to generate sales of 1.450 bottles per year at a cost of $120 per bottle in the first year, excluding depreciation. Each bottle can be sold for $200 in the first year. The sales price and cost are expected to increase by 10% per year due to inflation. The company takes a bank loan to finance the project, and is expected to pay $2,500 as interest expense per year over the life of the project. The company's tax rate is 35%, and its overall cost of capital (WACC) is 10%. Please refer to this MACRS schedule for depreciation schedule: Property Class Year 3-year 5-year 7-year 1 33.33% 20.00% 14.29% 2 44.45% 32.00% 24.49% 3 14.81% 19.20% 17.49% 4 7.41% 11.52% 12.49% 5 11.52% 8.93% 6 5.76% 8.92% 7 8.93%