Alias, Inc. is a maker of plastic containers for the food and beverage industry. Bruce Atkinson, Alias’ director of operations, is looking at upgrading the firm’s manufacturing capacity in an effort to improve the firm’s competitive position. Atkinson is being assisted by Linda Ralston, a financial analyst recently hired by Alias. Over the last three months, Ralston and Atkinson have been going to trade shows and conducting other research on different machines and processes used in the plastic container industry. 

Ralston estimates that travel and hotel costs expended as a result of their research amounted to $8,000. Atkinson considers the money well spent because he now had two great ideas for improving Alias’ competitiveness in the industry. The first of these ideas is that Atkinson is considering replacing a bottle blow molding machine. This machine was purchased for $40,000 2 years ago and is being depreciated for tax purposes over 2 years to a $1000 salvage value using straight-line depreciation. The firm has 2 years of depreciation remaining on the old machine. If Atkinson decides to make the replacement, the old machine can be sold today for $10,000. 

The new machine will cost the firm $100,000. According to Ralston’s projections, the new machine A will increase revenue by $40,000 per year for 3 years but will also increase costs by $5,000 per year, another changes caused by Machine A purchase will be increase in A/R and inventories by 12000 and increase in A/P by 10000, all of changes in NWC will be recovered in 3 years. The machine will be depreciated over a 3 year straight line depreciation. At the end of year 3, the equipment will be sold for $20,000. The firm’s tax rate is 45%. Also Machine B is available with following information: it costs 90000 with an installation cost of 5000, depreciated over 2 year, the machine B will result in savings of 55000 per year for the next 2 years in the end of which it can be sold for a symbolic price 1 $.

Atkinson is also considering an investment in a new silk screen labeling machine that can put labels on Alias plastic bottles as part of the manufacturing process. Ralston estimates that the new labeling machine will cost $50,000, and that shipping and installation costs will be $7,500. The addition of the labeling machine will require a $2,000 investment in spare parts inventory at the inception of the project, but these parts can be resold for $2,000 at the project’s end. Compared with the manual process that Alias used to use for putting on labels, Ralston estimates that the new machine will reduce costs by $20,000 per year for 4 years. The labeling machine will be depreciated over a straight line depreciation for 5-year. At the end of year 4, the equipment will be sold for $5,000. Before making the final calculations and after agreeing on WACC Atkinson and Ralston discuss net present value analysis for the projects they are considering. Ralston tells Atkinson, “when calculating the net present value of the two new projects, we also need to account for the costs expended as a result of researching the project options.” Atkinson makes a note on his legal pad and says to Ralston, “There is no need to make any adjustments for inflation in our net present value calculations because inflation is included as part of the expected returns used to calculate our weighted average cost of capital.” 

After their conversation, Ralston and Atkinson prepare their report to present to Alias’ CEO. As for WACC, the following information will help to find it: The weighted average cost is to be measured by using the following weights: 15% long-term debt, 10% preferred stock, and 75% common stock equity (retained earnings, new common stock, or both). Debt The firm can sell for $450 15year, $500 par-value bond paying annual interest at a 9% coupon rate. A flotation cost of 2% of the par value is required in addition to the discount of $10 per bond. Preferred stock Eight percent (annual dividend) preferred stock having a par value of $300 can be sold for $245. An additional fee of $2 per share must be paid to the underwriters. Common stock The firm’s common stock is currently selling for $75 per share. The dividend just paid at the end of last year (2021) is $12 and the rate of growth is 7%. 

Answer the following questions based on the above information. 

a. Calculate initial investment, incremental cash flows, and terminal cash flow for two possible replacement options machine A and Machine B. Complete the calculations by presenting both cash flow streams on a timeline. 

b. Use the discounted payback period to assess the acceptability and relative ranking of project replacement and expansion under the assumption that the company has a required PBP of 4.3 years.

c.Calculate WACC 

d. Assuming equal risk, use the following sophisticated capital budgeting techniques to assess the acceptability of replacement projects and expansion: (1) Net present value (NPV). (2) Internal rate of return (IRR) (use internet resources to calculate it). 

e Summarize the preferences indicated by the techniques used in parts d (1) and (2).

Do the projects have conflicting rankings? Is it accurate to use NPV to evaluate the acceptance of replacement projects in the case of machines A and B, why? f. With regard to the conversation between Ralston and Atkinson concerning NPV analysis is Ralston right or Atkinson or both of them? Explain