2. Capital Budgeting - Capital Budgeting and Risk Winnebagel Corp. is considering two alternative capital investment projects for future expansion: (1) expand production of its motor homes, which currently sell for $48,000 per unit, or (2) expand production of its luxury motor coaches, which currently sell for $85,000 per unit. If it invests to expand production of its motor homes, it expects to increase motor homes sales by 15,000 units per year at $48,000 each and reduce sales of luxury motor coaches by 550 units per year, over the next 5 years. If it invests to expand production of its luxury motor coaches, it expects to increase luxury motor coaches sales by 6,000 per year at $85,000 each and reduce sales of motor homes by 1,200 units per year, over the next 5 years. Cost of goods sold and selling, general & administrative expenses combine for a total of 45% of sales. Winnebagel Corp. expects that it would need capital investments in fixed assets of $800,000,000 for the motor homes expansion project, and $600,000,000 for the luxury motor coaches expansion project. Both assets are expected to be depreciated straight line to zero over the 5 years. Both assets are expected to have a salvage value of zero after 5 years. Both projects 2 require additional investment in inventory of $4,000,000 and additional accounts payable of $800,000. Winnebagel Corp. corporate tax rate is 34%. Winnebagel's investment banker estimates its weighted average cost of capital (WACC) at 15%. Evaluate the two capital investment project alternatives and make your recommendation using: a. Forecast the cash flows for the two projects. Motor Homes Project Year 0 Free Cash flow (FCF) 2 . Luxury Motor Coaches Project Year Free Cash flow (FCF) 2 3 b. Internal rate of return. IRR Motor Homes IRR Luxury Motor Coaches c. Net present value. NPV Motor Homes NPV Luxury Motor Coaches d. Recommendation. Which project is better