10. Finally, use NPV (Net Present Value) method to rank the investment proposals and select the most appropriate one to pursue. What is the most challenging aspect of the NPV method? (Please identify all the variables you use in your calculation when you use a calculator. Round your final answer to two decimal points. Ignore all CCA effect on cash flow). (15 Marks) Investment proposal #1 adding 5 trucks Initial expenditure Year 1 Year 2 Year 3 Year 4 Year 5 Net cost of trucks $ 310,000 Additional Revenue $ 49,000 $ 81,000 $ 117,000 230,000 $173,000 Additional cost (11,000) (11,000) (11,000) (11,000) (11,000) Amortization (45,000) (66,000) (63,000) (63,000) (63,000) Net increase in income (7,000) 4,000 43,000 156,000 99,000 Less: Tax at 33% 0 (1,320) (14,190) (51,480) (32,670) Increase in after-tax income (7,000) 2,680 28,810 104,520 66,330 Add back amortization 45,000 66,000 63,000 63,000 63,000 Net change in cash flow $(310,000) $38,000 $68,680 $91,810 $167,520 $129,330 The second proposal is to purchase a more advanced wood crafting machine. The projected revenues and costs and changes in net cash flow are summarized in the table below: Investment proposal #2 adding a wood crafting machine: Initial expenditure Year 1 Year 2 Year 3 Year 4 Year 5 Net cost of trucks $ 720,000 Additional Revenue $ 89,585 $ 177,585 $ 264,585 395,585 $327,585 Additional cost (26,000) (26,000) (26,000) (26,000) (26,000) Amortization (17,000) (17,000) (17,000) (17,000) (17,000) Net increase in income 46,585 134,585 221,585 352,585 284,585 Less: Tax at 33% (15,373) (44,413) (73,123) (116,353) (93,913) Increase in after-tax income 31,212 90,172 148,462 236,232 190,676 Add back amortization 17,000 17,000 17,000 17,000 17,000 Net change in cash flow $(720,000) $48,212 $107,172 $165,462 $253,232 $207,672 The third proposal is to add a new production line making new type of baby furniture. The projected increased revenues and costs and net changes in cash flows are summarized in the table below: Investment proposal #3 adding a new product line: Initial expenditure Year 1 Year 2 Year 3 Year 4 Year 5 Net cost of trucks $ 550,000 Additional Revenue $ 384,850 $ 313,850 $ 90,850 $73,850 $ 54,850 Additional cost (19,000) (19,000) (25,000) (31,000) (38,000) Amortization (76,000) (112,000) (107,000) (107,000) (107,000) Net increase in income 289,850 182,850 (41,150) (64,150) (90,150) Less: Tax at 33% (95,651) (60,341) 0 0 0 Increase in after-tax income 194,200 122,510 (41,150) (64,150) (90,150) Add back amortization 76,000 112,000 107,000 107,000 107,000 Net change in cash flow $(550,000) $270,200 $234,510 $65,850 $42,850 $16,850 Mr. Entrepreneur was very excited about the investment proposals. He was very anxious to know which projects they are going to pursue in the near future. Since he has very little training in capital budgeting, he needs some help in selecting the most promising project(s).