Answer each of the following questions completely.Clearly identify your answer and SHOW YOUR WORK!

Part 1

Spark Inc. is evaluating a new product and projects unit sales for product H as follows:

Year Unit Sales

1 108,000

2 127,000

3 115,000

4 98,000

5 84,000

Production of the product will require $1,500,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,350,000 per year, variable production costs are $225 per unit, and the units are priced at $345 each. The equipment needed to begin production has an installed cost of $23,000,000. Because the product is intended for professional use, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property (2).In five years, this equipment can be sold for about 20 percent of its acquisition cost. The company is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent.

The company's CEO wants to determine if the company should undertake the new product. (1)

1. Based on these preliminary project estimates, what is the NPV of the project?

2. What is the IRR?

3. Write a memo to the company's CEO (in good form) with your findings and attach your calculations as supporting documentation.

Hints

(1) Create a 5-year pro forma income statement to calculate operating cash flows

(2) MACRS Depreciation calculation:

1st Year Depreciation = Cost x (1 / Useful Life) x Depreciation Method x Depreciation Convention

Subsequent Years Depreciation = (Cost - Depreciation in Previous Years) x (1 / Recovery Period) x Depreciation Method

Part 2

Suppose the CEO of Pond Enterprises wants you to prepare a set of pro forma financial statements for a proposed project. Project assumptions are as follows:

1. Sales of 10,000 units/year @ $5/unit.
2. Variable cost/unit is $3. Fixed costs are $5,000/year. Project has no salvage value. Project life is 3 years.
3. Project cost is $21,000. Depreciation is $7,000/year. The project is financed with retained earnings.
4. Investment in net working capital is $10,000. The NWC investment occurs at the beginning of the project, and it is assumed that all NWC is converted into cash at the end of the project.
5. The firm's required return is 20%. The tax rate is 34%.

1. Calculate the project's Payback, NPV, and IRR (base-case).

1. Scenario analysis: Suppose the company believes that all estimates (sale quantity, price, variable cost/unit, and fixed cost) are accurate within10 percent. What are the best-case NPV and IRR? Worst-case NPV and IRR? (1)

1. Sensitivity analysis: Evaluate the sensitivity of the company's base-case NPV to changes in price. Calculate the project's NPV assuming a 10% price decline.

1. Break-even analysis: find the quantity for (a) accounting break-even (NI=0); (b) cash break-even (OCF=0); (c) financial break-even (NPV=0) (using base case)?

1. Write a memo to the company's CEO (in good form) with your findings and attach your calculations as supporting documentation.

Hints

(1) Best case increases sales, decreases costs. The worst case will behave in the opposite way.

Please include the formulas if possible. Thank you