8. A Capital Budgeting Problem Standard Food Company plans to establish a new production line for producing ice creams. The equipment costs $250,000 with a 5-year life. For depreciation the company is using MACRS method. The project is projected to generate $ 200,000 worth of sale in the first year. The sale will grow at 10% per year until the end of year 3, and then-10% per year until the end of year 5. The annual fixed expense is $ 40,000 per year, and the variable cost is always 35% of the revenue of the same year. Each 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 inventory will be liquidated. Also at the end of the project the equipment will be sold at a salvage value of $ 50,000. Assuming the tax rate is 40% and the cost of capital is 9% for the company. Create a capital budgeting table to show the free (overall) cash flows for the new project. Please show all details for full credits (25 points) Hint: must include operating cash flows, change of networking capital, initial investment, and salvage cash flow. a. b. Calculate the Project's NPV and Modified Internal Rate of Return assuming a 9% reinvestment rate (10 points) The company may be facing different scenarios other than the projected base scenario above. The probability of each scenario and its inputs are listed below: c. Base Good Probability Revenue each Year Salvage value of equipment 30% $50,000 $200,000 $300,000 25,000 $50,000 $100,000 30% 40% Please solve the NPV for each scenario (7 points), and the expected NPV and standard deviation of NPV based on all scenarios. (8 points) d. Please calculate the sensitivity of NPV to revenue (4 points) and the sensitivity of NPV to cost of equipment (4 points). (Hint: you can put a 10% increase for the variable and calculate the new NPV). Report which variable would affect NPV to a greater degree (2 points)