Assumptions for both alternatives:

* The companys cost of capital/discount rate is 6%

*The companys tax rate is 25%.

*The funds readily available for investment in the company are $275,000.

* The company will need to obtain financing for the remaining amount needed on any alternative.

Alternative A: Reconfigure Manufacturing to a New Form of Green Energy Product

The purpose of this alternative is to discontinue the windmill operations and invest in researching a new solar product that can be sold directly to consumers (commercial and residential). The existing manufacturing spaces can be used; however, new manufacturing equipment, skills training, and research investment would be required.

Investment: $7,800,000

The costs are broken down as follows:

Immediate Research & Development Expenses, $950,000. This can be supported through innovation funding available through government grants.

Investment in new machinery: $4,550,000.

Training & Inspections $1,300,000.

Payment of overhead expenses during the downtime: $1,000,000.

The windmill manufacturing equipment could be liquidated for $983,529.

Projection for the first year: Year 1: Revenue:$17,500,130; Direct Manufacturing Costs: $13,130,831; Expenses: $4,713,523.

After the first year, it is expected that revenue will increase steadily for 5 years by 10% annually. Manufacturing costs will slowly decrease at a rate of 5% per year due to improved knowledge and comfort with manufacturing processes. Expenses will remain a steady percentage of revenue (similar to the first year). Other notes on this alternative: The manufacturing equipment will depreciate at 10% per year (not included in the projected expenses above). The sales will not be limited to Canada. It is also expected that given the size of windmills compared to solar products, one of the warehouses can eventually be eliminated as storage of inventory will not require as much space. This will be sold in year 5 at an estimated $2,000,000.

Alternative B: Continue with Windmills but Expand Overseas

The second alternative is to continue with a focus on windmills (operations as is) but change the target market. Rather than selling through a distribution company in Canada, the windmills would be shipped to Europe or other overseas markets based on the new distribution partner identified.

Under this scenario, it is expected that the sales price of $652,013 per windmill will be maintained; however, there may be different regulatory requirements for the product itself. The following facts will help to evaluate the alternative:

An additional $8,100,000 will be required immediately to reconfigure design specs and manufacturing equipment based on international market requirements.

Additional annual expenses will include shipping and logistic costs totalling $29,130 per shipment (given the size of items and transcontinental requirements). This will be paid by CONFAB and is not included in the sales price. It is expected that current cash flow will not cover this additional cost and so funding will be required for CONFAB to have sufficient funds in the amount of $1,500,000 on reserve for the increased costs.

The existing gross profit margin is 37% on the windmills and is not expected to change.

The existing net profit margin (before tax) is 29%.

An international team will need to be set up to support sales, distribution and promotion. This

is expected to cost $3,700,000.

Annual depreciation expenses amount to $988,250 (included in current net profit

calculations). Expected unit sales:

Year 1: 39 Year 2: 46 Year 3: 50 Year 4: 48 Year 5: 53

Question: Calculate discounted payback, IRR, and NPV for each alternative.