6. You work for a consulting firm hired to analyze whether a firm should invest in its new product. The project's life has been estimated to be 15 years. Each unit can be manufactured for $30, and the estimated price it can be sold is $75. If the project is approved, the firm will need to hire 100 employees for $700,000 annually during the project's life. The firm will also need to rent the space for the new facility for $5,000,000 per year. The equipment necessary for production can be purchased for $40,000,000. Considering the decay and loss of equipment efficiency over the years, the firm will need to buy a second and smaller piece of equipment in year 10 for $20,000,000. While the original piece of equipment will be worthless on a market basis at the end of the project, the second piece will be able to be sold for $4,000,000. Following Tax code regulations, each piece must be depreciated following a schedule highlighted in the depreciation table below. To obtain the amount necessary for the initial investment, the firm will need to borrow money at a rate of 3% per year. To estimate the number of units that the firm will sell, you have access to historical data on a similar product. Based on your experience with this type of project, you have determined that you need to adjust the estimates obtained from historical data by increasing them by 10% during the first 8 years and then decreasing them by 15% during the last 7 years. It is known that the number of units can be properly explained by the median household income and number of households in the target market. Before production can start, the new facility must be constructed, and personnel must be trained. This implies that production in year 1 will be 0 . Subsequently, the requirement for net working capital will also start in year 2 and will occur with the timing of cash flows for the year. The investment in net working capital will be $1,000,000. The services being provided by your consulting firm cost $5,000,000 and will be paid over the next 5 years in equal $1,000,000 installments. Assuming a corporate tax rate of 21% and a required return of 12% a) Estimate the Cash flows of the project. ( 30 points) b) What is the payback and discounted payback? Interpret the results. (10 points) c) What is the profitability index? Interpret the result. (5 points) d) What is the IRR of the project? Interpret the result. ( 5 points) e) What is the NPV of the project? interpret the result. (5 points) f) Based on your analysis, make a recommendation to the firm. Explain your answer (10 points) 6. You work for a consulting firm hired to analyze whether a firm should invest in its new product. The project's life has been estimated to be 15 years. Each unit can be manufactured for $30, and the estimated price it can be sold is $75. If the project is approved, the firm will need to hire 100 employees for $700,000 annually during the project's life. The firm will also need to rent the space for the new facility for $5,000,000 per year. The equipment necessary for production can be purchased for $40,000,000. Considering the decay and loss of equipment efficiency over the years, the firm will need to buy a second and smaller piece of equipment in year 10 for $20,000,000. While the original piece of equipment will be worthless on a market basis at the end of the project, the second piece will be able to be sold for $4,000,000. Following Tax code regulations, each piece must be depreciated following a schedule highlighted in the depreciation table below. To obtain the amount necessary for the initial investment, the firm will need to borrow money at a rate of 3% per year. To estimate the number of units that the firm will sell, you have access to historical data on a similar product. Based on your experience with this type of project, you have determined that you need to adjust the estimates obtained from historical data by increasing them by 10% during the first 8 years and then decreasing them by 15% during the last 7 years. It is known that the number of units can be properly explained by the median household income and number of households in the target market. Before production can start, the new facility must be constructed, and personnel must be trained. This implies that production in year 1 will be 0 . Subsequently, the requirement for net working capital will also start in year 2 and will occur with the timing of cash flows for the year. The investment in net working capital will be $1,000,000. The services being provided by your consulting firm cost $5,000,000 and will be paid over the next 5 years in equal $1,000,000 installments. Assuming a corporate tax rate of 21% and a required return of 12% a) Estimate the Cash flows of the project. ( 30 points) b) What is the payback and discounted payback? Interpret the results. (10 points) c) What is the profitability index? Interpret the result. (5 points) d) What is the IRR of the project? Interpret the result. ( 5 points) e) What is the NPV of the project? interpret the result. (5 points) f) Based on your analysis, make a recommendation to the firm. Explain your answer (10 points)
