1. A shoe manufacturer is evaluating an investment in a new factory which will produce a new line of shoes. The new factory will require an up-froat investment of $1 million, which will be depreciated straight line over 5 years for tax purposes. The domand for these shoes is estimated to be 10,000 pairs in year one and will increase by 1,000 pairs per year for the next three years, after which it will remain constant for a further two years. After that production and sales will stop and the factory will need to be scrapped at a cost of $100,000. Leather and other raw materials used in the production process are estimated to cost $75 per pair. The finished goods will be sold for $115. 10% of the raw material will be beld in the warehouse at any time as working capital. Production requires two people in the factory. It also requires a half-time sales employee. Due to labor market regulations, the company can only hire full-time employees. The anutal salary of a full-time sales person is $40,000, and of a manufacturing person is $25,000. The corporate tax rate is 25%, paid in the year in which profits occur. You can assume that there will be no inflation, and that the company is able to use any tax shields generated by this project in the year when they are grnerated. The cost of capital for the project is 10%. (a) [40 points] Project the free cash flows relevant to the project, explaining precisely how you arrive at thooe figures. (b) [5 points] Should the shoe manufacturer invest in the new factory? (c) [5 points] If launching this new line of shoes were to result in a reduction in sales of other shoes also produced and marketed by the shoe matufacturer, would that need to be taken into account in the project evaluation? Why, or why not? 1 2. [50 points] The Financial Times is considering introducing a new monthly magaxine. The company anticipates that it will cost 120 million in initial costs to create the infrastracture needed to produce the magazine, and that it can depreciate this cost straight line over the next 10 years to a salvnge value of 25 million. The Financial Times expects to price the magazine at f2 an issue on the newstands and it expects advertising revenues of 81.50 per issue sold; the printing and production costs are expected to be fl per isue. The magazine's contents will be produced by the existing staff of the paper, but the Times will have to increase its total annual payroll cost, which is currently f20 million, by 10%. The cost of capital for the New York Times is 9% and it ean be used for this investment as well. The corpotate tax rate is 40%. How many magazines will the Financial Times have to sell each month to break even (in terms of NPV) on this investment at the end of the next 10 years