Aeroflex Technologies, Inc. currently manufactures after-market string trimmer blades and is considering expansion into the manufacturing of their own proprietary electric trimmers. Based on a preliminary market analysis, company management believes the product will be successful at $50 per unit, and expects to sell 15,000 units in the first year, 22,000 units in year 2, 30,000 units in year 3, 40,000 in year 4, and 45,000 in year 5. Further, the company will need to invest approximately $4,085,000 in new equipment, and will lease a new facility (the rent is included in the fixed cost estimate). The equipment will be depreciated to zero using 5-year MACRS. The estimated variable cost per unit is $15 and the fixed costs are expected to be approximately $160,000 per year. Management expects the production to continue indefinitely, and cash flows after year 5 are expected to grow at a rate commensurate with average inflation of about 2.8%. Net working capital required is expected to be approximately 10% of sales each year. The Company's estimated marginal tax rate is 28%. (Assume zero taxes if there is a negative pretax income)

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b) If the Company's required rate of return on the project is estimated to be 16%, should Aeroflex go forward with the project? (HINT: Utilize the best methodology to determine viability of the project) Answer c) Based on your calculation, should the company move forward with the project? Yes or no, and why? Yes or No Why? d) Calculate the profitability index for this project. Answer e) Calculate the payback period for the project. Answer FINC 303 - Fall 2020 Chapter 9 Extra Credit Case Study TABLE 9.7 MODIFIED ACRS DEPRECIATION ALLOWANCES Aeroflex Technologies, Inc. currently manufactures after-market string trimmer blades and is considering expansion into the manufacturing of their own proprietary electric trimmers. Based on a preliminary market analysis, company management believes the product will be successful at $50 per unit, and expects to sell 15,000 units in the first year, 22,000 units in year 2, 30,000 units in year 3, 40,000 in year 4, and 45,000 in year 5. Further, the company will need to invest approximately $4,085,000 in new equipment, and will lease a new facility (the rent is included in the fixed cost estimate). The equipment will be depreciated to zero using 5-year MACRS. The estimated variable cost per unit is $15 and the fixed costs are expected to be approximately $160,000 per year. Management expects the production to continue indefinitely, and cash flows after year 5 are expected to grow at a rate commensurate with average inflation of about 2.8%. Net working capital required is expected to be approximately 10% of sales each year. The Company's estimated marginal tax rate is 28%. (Assume zero taxes if there is a negative pretax income) Property Class 5-Year Year 3-Year 7-Year 1 20.00% 14.29% 2 32.00 24.49 33.33% 44.45 14.81 7.41 3 19.20 17.49 4 11.52 5 a) Calculate the cash flows to be expected from the project. (HINT: Don't forget the project is expected to continue indefinitely) 11.52 12.49 8.93 8.92 8.93 6 5.76 7 8 4.46 b) If the Company's required rate of return on the project is estimated to be 16%, should Aeroflex go forward with the project? (HINT: Utilize the best methodology to determine viability of the project) Answer c) Based on your calculation, should the company move forward with the project? Yes or no, and why? Yes or No Why? d) Calculate the profitability index for this project. Answer e) Calculate the payback period for the project. Answer FINC 303 - Fall 2020 Chapter 9 Extra Credit Case Study TABLE 9.7 MODIFIED ACRS DEPRECIATION ALLOWANCES Aeroflex Technologies, Inc. currently manufactures after-market string trimmer blades and is considering expansion into the manufacturing of their own proprietary electric trimmers. Based on a preliminary market analysis, company management believes the product will be successful at $50 per unit, and expects to sell 15,000 units in the first year, 22,000 units in year 2, 30,000 units in year 3, 40,000 in year 4, and 45,000 in year 5. Further, the company will need to invest approximately $4,085,000 in new equipment, and will lease a new facility (the rent is included in the fixed cost estimate). The equipment will be depreciated to zero using 5-year MACRS. The estimated variable cost per unit is $15 and the fixed costs are expected to be approximately $160,000 per year. Management expects the production to continue indefinitely, and cash flows after year 5 are expected to grow at a rate commensurate with average inflation of about 2.8%. Net working capital required is expected to be approximately 10% of sales each year. The Company's estimated marginal tax rate is 28%. (Assume zero taxes if there is a negative pretax income) Property Class 5-Year Year 3-Year 7-Year 1 20.00% 14.29% 2 32.00 24.49 33.33% 44.45 14.81 7.41 3 19.20 17.49 4 11.52 5 a) Calculate the cash flows to be expected from the project. (HINT: Don't forget the project is expected to continue indefinitely) 11.52 12.49 8.93 8.92 8.93 6 5.76 7 8 4.46