ABC company deals in agriculture machines. Due to severe price competition in the market, the company has been experiencing a decrease in revenues in recent times. The situation led the company to push its engineers to develop a unique and profitable product that could compete in the market. In the last company meeting, the design committee, headed by Mr Zakir, unveiled its unique product prototype called "Smart Seed Drill". This machine uses artificial intelligence to sow seeds to a certain depth and distance in the soil for cultivating crops. This equipment is attached to a tractor and further dragged onto the farm fields to ensure the seeds are sown and distributed to the soil properly. The machine uses sophisticated built-in technology to determine the depth and distance. The marketing department's surveys showed that this product would be a success and could secure a good market share if the company offered a competitive price. The survey results showed great demand forthis product at the end of both customers and retailers. It took almost three years to develop the prototype and test the product before marketing it to various exhibitions. As long as the quality of the product was related, the product passed all the required safety and quality standards. The company had not yet started fully producing this product because the newly appointed CEO was very conservative in his approach. The CEO wants the design team to present a comprehensive feasibility report of this product to the firm's investment committee chaired by Mr Riduan. After the committee's approval, the CEO will approve the product's full production. The feasibility report must include all the estimates of revenues, related costs, and acceptable documentation. Mr Zakir is very experienced and has been involved in similar projects in his previous job. He started collecting the required information to prepare a comprehensive feasibility report.

Using the marketing department survey report, he prepared the following Table 1.

Using the data supplied by the marketing department, Mr Zakir prepared Table 1, presenting the forecasted unit sales of Smart Seed Drill over its economic life of ten years. Table 1 also shows the expected unit's selling price. Due to competitive pressure, the marketing department had indicated that prices would drop in later years. It is also the market phenomenon that market players (competitors) start producing similar products after some time. The project followed seven years of MACRS rates for depreciation, as shown in Table 2. The first year of depreciation using the MACRS rates would start from year 1, not year 0.

Table 2: MACRS Depreciation Rates

The cost of equipment was estimated to be $20 million. This cost included shipping, handling, and installation costs as well. The equipment was expected to be sold at a market price of $4 million after ten years. It was indicated that the product's manufacturing would occur in an existing unoccupied company plant. The market survey revealed that monthly leases for similar plants averaged $10,000 in the market. The variable costs of production per unit were estimated to be $400. The expected fixed costs were $15,00,000 annually. To start the project, the company would purchase an additional inventory of $500,000. The company would also increase account receivables and payables by $1,000,000 and $600,000, respectively. In the subsequent years, Mr Zakir expected that the company's net working capital would make up to 5% of the sales. The average cost of capital of the company was 14 per cent. It was estimated that the corporate tax would remain constant at 34%. Mr Zakir found that the annual interest expenses on the debt financing were worth $400,000.

Required:

a. Prepare the pro forma statement of the Smart Seed Drill project's annual cash flows (6 Marks)

b. What are the NPV and IRR of the project? (2 Marks)

c. Prepare the NPV profile. Show the graph and excel working (2 Marks)

d. The investment committee could argue that the annual unit sold may go up or down by 15 per cent from its base forecast. How may these two scenarios affect the decision? Calculate NPV and IRR if annual sold units increase and decrease by 15%. (5 Marks)

Table 1: Forecasted Unit Sales and Price of Smart Seed Drill Table 1: Forecasted Unit Sales and Price of Smart Seed Drill