2. (15 pt) The GreenBall Inc. is evaluating the possibility of entering the golf ball manufacturing business. Last month the company spent $15m to rent the equipment for a small scale test run. Based on the results of the test run, the company came up with the following estimates:

The equipment has to be purchased at the beginning of the project (year 0). The original cost of the equipment is $105m, but the company can deduct the $15m payment it made to the equipment supplier last month for the test run if the company decides to purchase the equipment. The original cost of the equipment, $105m, will be depreciated straight line to zero over the project's 3-year life. The end-of-life salvage value is $30m.

The planned factory site is currently rented out to a neighboring company. If the company decides to enter the golf ball manufacturing business, it will lose $25m in after-tax rental income every year during the project's 3-year life.

Sales of golf balls are projected to be $90m, 210m, and $160m, for years 1,2, and 3 respectively; operating expenses are estimated to be 50% of sales.

Net working capital (NWC) investment of $3m is needed at the beginning of the project (year 0). Afterwards, an additional annual investment (or spending) of $5m is necessary for years 1-2. At the end of the project, all NWC will be recovered.

The company's tax rate is 30% and its cost of capital is 10%.

Use the NPV decision rule to determine whether GreenBall Inc. should enter the golf ball manufacturing business or not. (15 pt)

3. (all numbers are in thousands; 8 pt)

Jaffrey Inc. is considering the purchase of an automation machine with a cost of $350. The machine has an economic life of 5 years. It will be fully depreciated over the 5-year life using the straight-line method, and then be sold at $70 at the end of the 5-year life. The machine will replace 2 workers whose combined annual salaries are $100. However, this machine also requires additional investment in net working capital of $30 in the beginning, which will be fully recovered at the end of the machines life. The corporate tax rate is 30%.

Is it worthwhile to purchase this automation machine if the companys required rate of return is 10%?