4. A Capital Budgeting Project Standard Food Company plans to establish a new production line for producing ice creams. The equipment costs $2,500,000 with a 10-year life. For depreciation the company is using MACRS method. The project is expected to generate $ 1,050,000 sales in the first year and the sales is expected to grow by 5% every year afterwards. The annual fixed expense is $ 100,000 per year, and the variable cost is always 35% of the sales of the same year. Starting at year 0, the company needs to maintain an inventory that is worth 15% of next year's sale. At the end of the project, no inventory needs to be maintained and all existing inventories will be liquidated. The tax rate is 25% for capital gains and net income. The cost of capital (minimum required return) is 12% for the company, while the firm is paying $10,000 interest to every year debt holders as financing cost. Three years before the project starts, the company spent $40,000 for marketing research. a. Create a capital budgeting table with the calculation of Free Cash Flows for each year of the project. (22 points, you must show all your work to earn full credits) MACRS Depreciation rate for recover period of 10 years 1 2 3 4 5 6 7 8 9 10 10% 18% 14.40% 11.52% 9.22% 7.37% 6.55% 6.55% 6.56% 6.55% 3.28% You can copy and paste the MACRS table above to your spreadsheet for calculation. b. Calculate the Project's NPV, IRR, Regular Payback Period, Discounted Payback Period and Modified Internal Rate of Return, assuming a 9% reinvestment rate (15 points) Please show all your work for full credit. c. From part b, please calculate the sensitivity of NPV to sales (3 points) and the sensitivity of NPV to the cost of equipment at year 0 (3 points). (Hint: you can put a 10% increase for each variable and calculate the corresponding NPV). Which variable would affect NPV more effectively? (Extra credit 3 points if you create a Scatter Chart in Excel to show the sensitivities of the two variables)