$13-35$Argile Textiles is evaluating a new product, a silk$/$wool blended fabric. Assumethat you were recently hired as assistant to the director of capital budgeting, andyou must evaluate the proposed project.The fabric would be produced in an unused building located adjacent toArgile$$s Southern Pines, North Carolina, plant; Argile owns the building,which is fully depreciated. The required equipment would cost $$200,000,$plus an additional $$40,000$ for shipping and installation. With the new project,inventories would rise by $$25,000,$ and accounts payable would increase by$$5,000.$ All of these costs would be incurred at t$0.$ By a special ruling, themachinery could be depreciated under the MACRS system as $3-$year property$($see Appendix $13$A$).$The project is expected to operate for four years, and then be terminated.The cash inflows are assumed to begin one year after the project is undertaken,or at t$1,$ and to continue to t$4.$ At the end of the project$$s life $($t$4),$ theequipment is expected to have a salvage value of $$25,000.$Unit sales are expected to total $100,000$ five$-$yard rolls per year, and theexpected sales price is $$2$ per roll. Cash operating costs for the project $($totaloperating costs excluding depreciation$)$ are expected to amount to $60$ percent ofdollar sales. Argile$$s marginal tax rate is $40$ percent, and its required rate ofreturn is $10$ percent. Tentatively, the silk$/$wool blend fabric project is assumedto be of equal risk to Argile$$s other assets.You have been asked to evaluate this project and to make an accept$/$rejectrecommendation$.$ To guide you in your analysis, your boss has asked you toanswer the following set of questions.

a$.$What is capital budgeting? Are there any similarities between a firm$$scapital budgeting decisions and an individual$$s investment decisions?

b$.$What is the difference between independent and mutually exclusive proj$-$ects? Between projects with conventional cash flows and projects withunconventional cash flows? Between replacement analysis andexpansion analysis?

c$.$Draw a cash flow timeline that shows when the net cash inflows and out$-$flows will occur with Argile$$s proposed project, and explain how the time$-$line can be used to help structure the analysis.d$.$Argile has a standard form that is used in the capital budgeting process; it is shown in Table IP$13-1.$ Part of the table has been completed, but youmust compute the missing values. Complete the table in the following steps:$(1)$Complete the unit sales, sales price, total revenues, and operating costs$($excluding depreciation$)$ lines.$(2)$Complete the depreciation line.$(3)$Complete the table down to net income and then down to net operatingcash flows.$(4)$Fill in the blanks under Year $0$ and Year $4$ for the initial investmentoutlay and the terminal cash flows, respectively. Next, complete thecash flow timeline $($net cash flow$).$ Discuss the role of working capital. What would have happened if the machinery were sold for less thanits book value?

$\backslash$table$[[$End of Year:,$0,1,2,3,4],[$Unit sales $($thousands$),,,100,,],[$Price$/$unit$,,\frac{?}{\text{b}\text{a}\text{r}}($$$2\mathrm{.}00),$$$2\mathrm{.}00,,],[$Total revenues,,,,$$200\mathrm{.}0,],[$Costs excluding depreciation,,,$\frac{?}{\text{b}\text{a}\text{r}}(($$$120\mathrm{.}0)),,],[$Depreciation$,,,,\frac{?}{\text{b}\text{a}\text{r}}((36\mathrm{.}0)),(16\mathrm{.}8)$