4) After the empirical results, Han would like to provide the recommendation to Amanda and Board of Directors, what is Hans recommendation? Amanda also wants Han to provide a sensitivity analysis and change any one of elements documented before and see what happens? For example, increase or decrease growth rate and at what level the firm can break even when NPV=0.

Choice 2: Capital Budgeting Decision Since LSUS corporation is producing at full capacity, Amanda has decided to have Han examine the feasibility of a new manufacturing plant. This expansion would represent a major capital outlay for the company. A preliminary analysis of the project has been conducted at a cost of $1.6 million. This analysis determined that the new plant will require an immediate outlay of $54 million and an additional outlay of $31 million in one year. The company has received a special tax dispensation that will allow the building and equipment to be depreciated on a 20-year MACRS schedule. For Property Placed in Service after December 31, 1986 10-Year 3-Year 7-Year 15-Year 20-Year Recovery Year 5-Year (200% DB) (200% DB) (200 % DB) (200 % DB ) (150% DB) (1509% DB) 5.00 10.00 18.00 3333 1 20.00 14.29 3.750 7.219 44.45 32.00 24.49 9.50 1481 3 19.20 1749 6.677 14.40 8.55 11.52 7.70 6.177 4 741 11.52 12.49 11.52 8.93 6.93 5.713 9.22 5.76 7.37 6.23 5.285 8.92 655 5.90 8.93 4.888 4.46 6.55 S.90 4522 8 6.56 S.91 4.462 655 5.90 10 4.461 3.28 5.91 4.462 11 5.90 12 4461 5.91 13 4.462 14 5.90 4.461 5.91 4.462 15 16 2.95 4.461 17 4.462 18 4.461 4.462 19 4.461 20 21 2.231 Swinchover to straight-line depreciation Because of the time necessary to build the new plant, no sales will be possible for the next year. Two years from now, the company will have partial-year sales of $17 million. Sales in the following four years will be $28 million, $37 million, $40 million, and $43 million. Because the new plant will be more efficient than LSUS corporation's current manufacturing facilities, variable costs are expected to be 65 percent of sales, and fixed costs will be $2.4 million per year. The new plant will also require net working capital amounting to 8 percent of sales for the next year Han realizes that sales from the new plant will continue into the indefinite future. Because of this, he believes the cash flows after Year 5 will continue to grow at 2.5 percent indefinitely. The company's tax rate is 40 percent and the required retun is 12 percent