2. a. Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land 11 years ago for $6 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $10 million. The company wants to build its new manufacturing plant on this land; the plant will cost $14.2 million to build, and the site requires $1,200,000 worth of grading before it is suitable for construction. What are the relevant cash flows to consider? b. A project is expected to create operating cash flows of $31,000 a year for three years. The initial cost of the fixed assets is $64,000. These assets will be worthless at the end of the project. An additional $2,500 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 15 percent? c. Down under Boomerang, Inc., is considering a new four-year expansion project that requires an initial fixed asset investment of $1.4 million. The fixed asset will be depreciated using 3-year MARCS schedule. The project is estimated to generate $1,120,000 in annual sales, with costs of $480,000. The project requires an initial investment in net working capital of $285,000 and the fixed asset will have a market value of $225,000 at the end of the project. The tax rate is 35 percent and the required return is 12 percent. What is the project's NPV? d. Dog Up! Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated straight- line to zero over the project's five-year life, at the end of which the project's five-year life, at the end of which the sausage system can be scrapped for $40,000. The sausage system will save the firm $105,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $28,000. If the tax rate is 34 percent the discount rate is 10 percent, what is the NPV of this project? e. We are evaluating a project that costs $645,000, has an three-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 70,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $725,000 per year. The tax rate is 35 percent, and we require a 15 percent return on this project. - Calculate the base-case cash flow and NPV. - What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs. - Supposes the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +10 percent. What is your best scenario OCF and worse scenario OCF