ABC Learning Limited considers selling new diagnostic products and it has the following estimates for this new project: price=$567 per unit, variable costs=$200 per unit, fixed costs=$6,795,000, quantity=60,000 units. By adding the new diagnostic product, management estimates that they will decrease the sales of existing products by 25,000 units per year. The existing products sell for $720 per unit and the variable cost per unit is $250. ABC Learning Limited has spent about $170,000 for a marketing study, and about $330,000 on research and development for the new diagnostic products. The initial investment required is $6,600,000 in fixed assets, and these assets can be depreciated straight-line to zero. These assets are considered to have a 6year life time, but be noted that the ABC Learning management has decided to look at a 3year project time frame because of future developments in diagnostic products. ABC Learning Limited expects that in 3 years the equipment can be sold for about 30% of its acquisition cost. The new project will require $300,000 of net working capital at the start of the project, which is recoverable at the end of the project. ABC Learning currently has $4,000,000 of liabilities on the 4.5% of interest rate p.a. The company tax rate is 30%.

Required:

a. Please create pro forma financial statements including the income statement and projected total cash flow.

b. Using the information obtained in (a), please calculate the NPV of the project when the required rate of return is 12%.

c. Based on the NPV rule, will you accept this project? Also write down the reason for your decision.

d. Using the information obtained in (a), please calculate the PI (profitability index) when the required rate of return is 12%.

e. Based on the PI rule, will you accept this project? Also write down the reason for your decision.

f. Using the information obtained in (a), please calculate the payback period.

g. Based on the payback rule, will you accept this project, provided that the cut-off payback period of this company is 2.5 years? Also write down the reason for your decision.