ATTENTION BEFORE TAKING THE QUESTION READ!! This is the second time I am posting this question ; I initially posted and I got my refund back from course hero because not good and correct work was submitted from the tutor. I have posted a finance case that requires deeply finance skills so,I encourage you taking a deep look at the case before accepting it !! It need deeply excel calculations and critical thinking please don't take it unless you are sure from your skills, I am gonna claim my money back for any miss calculation or work that i am not happy with. I am paying 45 dollars to get good work remember. Required things are: calculations that have to be done on excel sheet and the short memo Thank you

Case: You are a team of financial analysts of the Gadget Division of The FGM Corporation, the largest multinational a production of a new voice-activated electronic device - Universal Direction Assistance (UDA). This upgradeabl directions and real time traffic reports that guide automobile drivers in choosing the preferred route to their d geographical information and real time traffic report (where technology is available) that are translated into th comprehensive market analysis on the potential demand for this device was conducted last year at a cost of $ According to the results of the market analysis, the expected annual sale volumes of UDA are 1.8M units for th expected to be $600 for the first two years, and then fall to $450, due to the introduction of similar devices by growth rate for unit production costs are expected to be 4% per year over the remaining life of the project . In addition, the implementation of the project demands current assets to be set at 12% of the annual sale re UDA will increase the sales volume of cars and trucks that leads to an increase in the annual after-tax cash flow The production line for UDA will be set up in a vacant plant that was built by FGM at a cost of $30M twenty ye termination of this project for $12M in four years. The machinery for producing UDA has an invoice price of $1 classified in the MACR 3-year class for depreciation purpose. The 5 machinery is expected to have zero salvage be 15%. The estimated marginal tax rate of The FGM Corporation is 30%. I need the answer for the following question after performing the calcu Question: Write a short memo to the Director of the Gadget Division, Mr. Ben Black, to present your tea Be sure to address the following questions on your memo. 1. In light of the appropriate objective of a firm, what would you recommend on the UDA Project basing on th 2. Would your recommendation be changed if the unit price of the UDA only falls to $550 upon the entrance o price falls to $350 after two years? Why? 3. What would be your recommendation on this UDA Project if there is 75% chance that the base scenario (i.e only falls to $550 after two years) will occur, and 5% chance that the pessimistic scenario (i.e., unit price falls t e largest multinational automobile manufacturer in the world. You are asked to evaluate a project proposal regarding the (UDA). This upgradeable device, which incorporates the most advanced computer and satellite wireless technology, provide referred route to their destinations. This device can be used in any country with specialized software that contains local hat are translated into the chosen language of the driver. UDA will be sold as an option for the FGM cars and trucks. A d last year at a cost of $10M. DA are 1.8M units for the first two years, and drop to 1.5M units for the final two years of this 4-year project. Unit prices are on of similar devices by competitors, afterwards. Unit production costs are estimated at $500 in the first year of the project ng life of the project 2% of the annual sale revenues, and current liabilities to be set at 8% of the annual production costs. Besides, the introductio nnual after-tax cash flow of FGM by $21M. cost of $30M twenty years ago. This fully depreciated plant has a current market value of $20M, and is expected to be sold as an invoice price of $120M, and its modification costs another $15M. The machinery has an economic life of 4 years, and ted to have zero salvage value at the termination of the project. The cost of capital (or discount rate) for this project is assum rming the calculations on excel on sheet number 2 ack, to present your team's analysis and conclusions. UDA Project basing on the (base) scenario described above? Why? 550 upon the entrance of competitive products after two years into this project? What would be your recommendation if th at the base scenario (i.e., unit price falls to $450 after two years) will occur, 20% chance that the optimistic scenario (i.e., un rio (i.e., unit price falls to $350 after two years) will occur? Why? oposal regarding the ess technology, provides that contains local ars and trucks. A r project. Unit prices are first year of the project. The Besides, the introduction of d is expected to be sold at the mic life of 4 years, and is for this project is assumed to r recommendation if the unit mistic scenario (i.e., unit price Gadget Division - UDA Proposal Machinery Costs ($) $ 120,000,000 Modification Costs ($) $ 15,000,000 Plant & Properties Opportunity Costs ($) $ 20,000,000 Salvage Value - Plant ($) $ 12,000,000 Salvage Value - Machinery ($) 0 Cost of Capital (%) 15% Tax Rate (%) 30% Positive side effect Operating Cash Flow ($) $ 21,000,000 Calculated the NPV and exptect NPV after perofming the calculations for base, optimisstic and pessimitic scenrio do Probability Net present value 75% 20% 5% Base Scenario Optimistic Scenario Pessimistic Scenario The below calculations must be done before calculating the NPV and expected NPV above BASE SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) Incremental Costs ($) Depreciation ($) EBIT ($) Taxes ($) INCREMENTAL OPERATING CASH FLOWS, OCF ($) POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT $ (149,000,000) NET PRESENT VALUE, NPV ($) OPTIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) YEAR 1 Annual Sales Volume (units) Unit Price ($) Unit Production Costs ($) Incremental Revenues ($) Incremental Costs ($) Depreciation ($) EBIT ($) Taxes ($) INCREMENTAL OPERATING CASH FLOWS, OCF ($) POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) Net Working Capital ($) $ - INCREMENTAL CASH FLOW TO PROJECT $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) NET PRESENT VALUE, NPV ($) $0.00 PESSIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) YEAR 1 Annual Sales Volume (units) Unit Price ($) Unit Production Costs ($) Incremental Revenues ($) Incremental Costs ($) Depreciation ($) EBIT ($) Taxes ($) INCREMENTAL OPERATING CASH FLOWS, OCF ($) POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) Net Working Capital ($) $ - INCREMENTAL CASH FLOW TO PROJECT $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) NET PRESENT VALUE, NPV ($) Depreciation Depreciation Book Rate Expenses ($) Value ($) 33.33% $ 44,995,500 $ 90,004,500 44.45% $ 60,007,500 $ 29,997,000 14.81% $ 19,993,500 $ 10,003,500 7.41% $ 10,003,500 0 Depreciable Costs $ 135,000,000 se, optimisstic and pessimitic scenrio down below Expected Net present value ed NPV above YEAR 2 YEAR 3 1,800,000 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 450.00 $ 450.00 $ 520.00 $ 540.80 $ 562.43 YEAR 2 YEAR 3 YEAR 4 YEAR 2 YEAR 3 YEAR 4 Case: You are a team of financial analysts of the Gadget Division of The FGM Corporation, the largest multinational a production of a new voice-activated electronic device - Universal Direction Assistance (UDA). This upgradeabl directions and real time traffic reports that guide automobile drivers in choosing the preferred route to their d geographical information and real time traffic report (where technology is available) that are translated into th comprehensive market analysis on the potential demand for this device was conducted last year at a cost of $ According to the results of the market analysis, the expected annual sale volumes of UDA are 1.8M units for th expected to be $600 for the first two years, and then fall to $450, due to the introduction of similar devices by growth rate for unit production costs are expected to be 4% per year over the remaining life of the project . In addition, the implementation of the project demands current assets to be set at 12% of the annual sale re UDA will increase the sales volume of cars and trucks that leads to an increase in the annual after-tax cash flow The production line for UDA will be set up in a vacant plant that was built by FGM at a cost of $30M twenty ye termination of this project for $12M in four years. The machinery for producing UDA has an invoice price of $1 classified in the MACR 3-year class for depreciation purpose. The 5 machinery is expected to have zero salvage be 15%. The estimated marginal tax rate of The FGM Corporation is 30%. I need the answer for the following question after performing the calcu Question: Write a short memo to the Director of the Gadget Division, Mr. Ben Black, to present your tea Be sure to address the following questions on your memo. 1. In light of the appropriate objective of a firm, what would you recommend on the UDA Project basing on th 2. Would your recommendation be changed if the unit price of the UDA only falls to $550 upon the entrance o price falls to $350 after two years? Why? 3. What would be your recommendation on this UDA Project if there is 75% chance that the base scenario (i.e only falls to $550 after two years) will occur, and 5% chance that the pessimistic scenario (i.e., unit price falls t e largest multinational automobile manufacturer in the world. You are asked to evaluate a project proposal regarding the (UDA). This upgradeable device, which incorporates the most advanced computer and satellite wireless technology, provide referred route to their destinations. This device can be used in any country with specialized software that contains local hat are translated into the chosen language of the driver. UDA will be sold as an option for the FGM cars and trucks. A d last year at a cost of $10M. DA are 1.8M units for the first two years, and drop to 1.5M units for the final two years of this 4-year project. Unit prices are on of similar devices by competitors, afterwards. Unit production costs are estimated at $500 in the first year of the project ng life of the project 2% of the annual sale revenues, and current liabilities to be set at 8% of the annual production costs. Besides, the introductio nnual after-tax cash flow of FGM by $21M. cost of $30M twenty years ago. This fully depreciated plant has a current market value of $20M, and is expected to be sold as an invoice price of $120M, and its modification costs another $15M. The machinery has an economic life of 4 years, and ted to have zero salvage value at the termination of the project. The cost of capital (or discount rate) for this project is assum rming the calculations on excel on sheet number 2 ack, to present your team's analysis and conclusions. UDA Project basing on the (base) scenario described above? Why? 550 upon the entrance of competitive products after two years into this project? What would be your recommendation if th at the base scenario (i.e., unit price falls to $450 after two years) will occur, 20% chance that the optimistic scenario (i.e., un rio (i.e., unit price falls to $350 after two years) will occur? Why? oposal regarding the ess technology, provides that contains local ars and trucks. A r project. Unit prices are first year of the project. The Besides, the introduction of d is expected to be sold at the mic life of 4 years, and is for this project is assumed to r recommendation if the unit mistic scenario (i.e., unit price Gadget Division - UDA Proposal Machinery Costs ($) $ 120,000,000 Modification Costs ($) $ 15,000,000 Plant & Properties Opportunity Costs ($) $ 20,000,000 Salvage Value - Plant ($) $ 12,000,000 Salvage Value - Machinery ($) 0 Cost of Capital (%) 15% Tax Rate (%) 30% Positive side effect Operating Cash Flow ($) $ 21,000,000 Calculated the NPV and exptect NPV after perofming the calculations for base, optimisstic and pessimitic scenrio do Probability Net present value 75% $ 20% 5% Base Scenario Optimistic Scenario Pessimistic Scenario 22,953,660.80 $163,862,248.17 ($117,954,926.58) The below calculations must be done before calculating the NPV and expected NPV above BASE SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 Incremental net cash flows $ $ $ $ 40,501,350 94,503,150 44,995,500 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 Current Assets $ 129,600,000 Current Liabilities $ 72,000,000 Net Working Capital ($) $ 57,600,000 EBIT ($) Taxes ($) at 30% INCREMENTAL OPERATING CASH FLOWS, OCF ($) Add back Depreciation Net Working Capital ($) CHANGE in NET WORKING CAPITAL ($) $ - TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT ($) $ (149,000,000) $ 218,098,650 $ 22,953,660.80 NET PRESENT VALUE, NPV ($) OPTIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ (149,000,000) YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 Incremental net cash flows $ $ $ $ 40,501,350 94,503,150 44,995,500 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 218,098,650 EBIT ($) Taxes ($) at 30% INCREMENTAL OPERATING CASH FLOWS, OCF ($) Add back Depreciation Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT ($) $ NET PRESENT VALUE, NPV ($) $163,862,248.17 PESSIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ (149,000,000) YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 Incremental net cash flows $ $ $ $ 40,501,350 94,503,150 44,995,500 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 current assets $ 129,600,000 EBIT ($) Taxes ($) INCREMENTAL OPERATING CASH FLOWS, OCF ($) Add back Depreciation current liabiliities Net Working Capital ($) 72000000 $ - $ 57,600,000 $ 57,600,000 (149,000,000) $ 218,098,650 CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT ($) NET PRESENT VALUE, NPV ($) $ ($117,954,926.58) MEMO: Based on the above answers, the NPV of both the base and optimisti is negative. This means that the two scenerios, both optimistic and b Since the three tend to be mutually exclusive,then optimistic sceneri that is, it has the highest NPV. Depreciation Depreciation Book Rate Expenses ($) Value ($) 33.33% $ 44,995,500 $ 90,004,500 44.45% $ 60,007,500 $ 29,997,000 14.81% $ 19,993,500 $ 10,003,500 7.41% $ 10,003,500 0 Depreciable Costs $ 135,000,000 timisstic and pessimitic scenrio down below Expected Net present value $17,215,245.60 $32,772,449.63 ($5,897,746.33) YEAR 2 YEAR 3 1,800,000 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 450.00 $ 450.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 675,000,000 $ 675,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (156,193,500) $ $ $ $ $ 25,197,750 58,794,750 60,007,500 118,802,250 $ $ $ $ $ 21,000,000 $ $ $ $ $ (53,595,450) (125,056,050) 10,003,500 (115,052,550) $ 21,000,000 $ 21,000,000 129,600,000 $ 81,000,000 $ 81,000,000 $ 74,880,000 $ 64,896,000 $ 67,491,840 $ 54,720,000 $ 16,104,000 $ 13,508,160 2,880,000 $ (38,616,000) $ (2,595,840) $ (46,858,050) (109,335,450) 19,993,500 (89,341,950) 10,003,500 (178,651,500) $ $ 142,682,250 $ YEAR 2 (106,957,950) $ YEAR 3 1,800,000 (96,648,390) YEAR 4 1,500,000 1,500,000 $ 600 $ 550 $ 550 $ 520 $ 541 $ 562 $ 1,080,000,000 $ 825,000,000 $ 825,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (6,193,500) $ 10,003,500 (28,651,500) $ $ $ $ 25,197,750 58,794,750 60,007,500 118,802,250 $ 21,000,000 $ 54,720,000 $ $ $ $ $ (1,858,050) (4,335,450) 19,993,500 15,658,050 $ $ $ $ (8,595,450) (20,056,050) 10,003,500 (10,052,550) ### $ 21,000,000 $ 34,104,000 $ 31,508,160 2,880,000 $ (20,616,000) $ (2,595,840) $ $ 142,682,250 YEAR 2 $ 16,042,050 $ YEAR 3 1,800,000 8,351,610 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 350.00 $ 350.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 525,000,000 $ 525,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (306,193,500) $ $ $ $ $ 25,197,750 58,794,750 60,007,500 118,802,250 $ 21,000,000 $ 129,600,000 $ $ $ $ $ 74880000 (91,858,050) (214,335,450) 19,993,500 (194,341,950) 10,003,500 (328,651,500) $ $ $ $ (98,595,450) (230,056,050) 10,003,500 (220,052,550) ### $ 21,000,000 63,000,000 $ 63,000,000 64896000 67491840 $ 54,720,000 $ (1,896,000) $ (4,491,840) $ 2,880,000 $ (56,616,000) $ (2,595,840) $ 142,682,250 $ (229,957,950) $ (201,648,390) PV of both the base and optimistic scenerio is positive while that of pessimistic scenerio o scenerios, both optimistic and base can be proceeded with since higher returns are guaranteed. exclusive,then optimistic scenerio is the one that should be undertaken since it guarantees the highest return , highest return , Gadget Division - UDA Proposal Machinery Costs ($) $ 120,000,000 Modification Costs ($) $ 15,000,000 Plant & Properties Opportunity Costs ($) $ 20,000,000 Salvage Value - Plant ($) $ 12,000,000 Salvage Value - Machinery ($) 0 Cost of Capital (%) 15% Tax Rate (%) 30% Positive side effect Operating Cash Flow ($) $ Probability NPV 75% 20% 5% Base Scenario Optimistic Scenario Pessimistic Scenario 21,000,000 ($20,150,850.69) $97,085,951.63 ($137,390,054.38) BASE SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 EBIT ($) Taxes ($) Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) ($20,150,850.69) OPTIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 EBIT ($) Taxes ($) Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) $97,085,951.63 PESSIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 EBIT ($) Taxes ($) Net Working Capital ($) CHANGE in NET WORKING CAPITAL ($) $ - TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) (149,000,000) $ ($137,390,054.38) 102,898,650 Depreciation Depreciation Book Rate Expenses ($) Value ($) 33.33% $ 44,995,500 $ 90,004,500 44.45% $ 60,007,500 $ 29,997,000 14.81% $ 19,993,500 $ 10,003,500 7.41% $ 10,003,500 0 Depreciable Costs $ 135,000,000 Expected NPV YEAR 2 1,800,000 YEAR 3 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 450.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 675,000,000 $ 675,000,000 $ 936,000,000 $ 811,200,000 $ 843,645,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (156,193,500) $ 10,003,500 (178,648,500) $ $ 25,197,750 $ 118,802,250 $ (46,858,050) $ (89,341,950) $ (53,594,550) (115,050,450) ### $ 21,000,000 $ 21,000,000 $ 54,720,000 $ $ (2,880,000) $ $ 142,682,250 $ 16,104,000 ### $ 13,508,400 (38,616,000) $ (2,595,600) $ 5,804,400 (29,725,950) $ (85,650,450) Sulvage of plant after 4 years YEAR 2 1,800,000 YEAR 3 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 550.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 825,000,000 $ 825,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (6,193,500) $ 10,003,500 (28,651,500) $ $ 25,197,750 $ 118,802,250 $ (1,858,050) $ 15,658,050 $ (8,595,450) (10,052,550) $ 21,000,000 $ 21,000,000 $ 21,000,000 $ 54,720,000 $ 34,104,000 $ 31,508,160 $ (2,880,000) $ (20,616,000) $ (2,595,840) $ 5,804,160 $ 19,347,450 $ 142,682,250 $ 57,274,050 ### YEAR 2 YEAR 3 YEAR 4 1,800,000 1,500,000 1,500,000 $ 600.00 $ 350.00 $ 520.00 $ 540.80 $ 562.43 ### $ 1,080,000,000 $ 525,000,000 $ 525,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (306,193,500) $ 10,003,500 (328,651,500) $ $ 25,197,750 $ 118,802,250 $ (91,858,050) $ (194,341,950) $ (98,595,450) (220,052,550) $ 21,000,000 $ 21,000,000 $ 21,000,000 $ 54,720,000 $ (1,896,000) $ (4,491,840) $ (2,880,000) $ (56,616,000) $ (2,595,840) $ 142,682,250 $ $ 5,804,160 (116,725,950) $ (190,652,550) vage of plant after 4 years Gadget Division - UDA Proposal Machinery Costs ($) $ 120,000,000 Modification Costs ($) $ 15,000,000 Plant & Properties Opportunity Costs ($) $ 20,000,000 Salvage Value - Plant ($) $ 12,000,000 Salvage Value - Machinery ($) 0 Cost of Capital (%) 15% Tax Rate (%) 30% Positive side effect Operating Cash Flow ($) $ Probability NPV 75% 20% 5% Base Scenario Optimistic Scenario Pessimistic Scenario 21,000,000 ($20,150,850.69) $97,085,951.63 ($137,390,054.38) BASE SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 EBIT ($) Taxes ($) Net Working Capital ($) $ CHANGE in NET WORKING CAPITAL ($) - TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) ($20,150,850.69) OPTIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 EBIT ($) Taxes ($) Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) $97,085,951.63 PESSIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 EBIT ($) INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 Taxes ($) Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) ($137,390,054.38) Memo. My recommendation on the UDA Project basing on the (base) scenario descr undertaken at the stated selling prices as well as the cost price since the NPV guaranteed returns yields to the investors. My recommendation will be changed by the unit price of the UDA fall to $55 two years into this project since even after the entrace of the competitor and f meaning that returns are guaranteed, that is, there will be value for money on My recommendation on this UDA Project when there is 75% chance that the after two years) will occur, 20% chance that the optimistic scenario, that is, th occur and 5% chance that the pessimistic scenario, that is, the unit price falls since this fall in price to 350 per unit will result to negative NPV thus making returns will be yielded on the investment. Depreciation Depreciation Book Rate Expenses ($) Value ($) 33.33% $ 44,995,500 $ 90,004,500 44.45% $ 60,007,500 $ 29,997,000 14.81% $ 19,993,500 $ 10,003,500 7.41% $ 10,003,500 0 Depreciable Costs $ 135,000,000 Expected NPV YEAR 2 1,800,000 YEAR 3 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 450.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 675,000,000 $ 675,000,000 $ 936,000,000 $ 811,200,000 $ 843,645,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (156,193,500) $ 10,003,500 (178,648,500) $ $ 25,197,750 $ 118,802,250 $ (46,858,050) $ (89,341,950) $ (53,594,550) (115,050,450) ### $ 21,000,000 $ 21,000,000 $ 54,720,000 $ $ (2,880,000) $ $ 142,682,250 $ 16,104,000 ### $ 13,508,400 (38,616,000) $ (2,595,600) $ 5,804,400 (29,725,950) $ (85,650,450) Sulvage of plant after 4 years YEAR 2 1,800,000 YEAR 3 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 550.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 825,000,000 $ 825,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (6,193,500) $ 10,003,500 (28,651,500) $ $ 25,197,750 $ 118,802,250 $ (1,858,050) $ 15,658,050 $ (8,595,450) (10,052,550) $ 21,000,000 $ 21,000,000 $ 21,000,000 $ 54,720,000 $ 34,104,000 $ 31,508,160 $ (2,880,000) $ (20,616,000) $ (2,595,840) $ 5,804,160 $ 19,347,450 $ 142,682,250 $ 57,274,050 ### YEAR 2 YEAR 3 YEAR 4 1,800,000 1,500,000 1,500,000 $ 600.00 $ 350.00 ### $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 525,000,000 $ 525,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (306,193,500) $ 10,003,500 (328,651,500) $ $ 25,197,750 $ 118,802,250 $ (91,858,050) $ (194,341,950) $ $ 21,000,000 $ 21,000,000 $ 21,000,000 $ 54,720,000 $ (1,896,000) $ (4,491,840) $ (2,880,000) $ (56,616,000) $ (2,595,840) $ 5,804,160 (116,725,950) $ (190,652,550) $ 142,682,250 $ (98,595,450) (220,052,550) Project basing on the (base) scenario described above is that the project should NOT be ices as well as the cost price since the NPV obtained is negative meaning that there is no ged by the unit price of the UDA fall to $550 upon the entrance of the competitive products after ven after the entrace of the competitor and fall in price, the NPV will now positive ed, that is, there will be value for money on the investment. A Project when there is 75% chance that the base scenario, that is, the unit price falls to $450 hance that the optimistic scenario, that is, the unit price only falls to $550 after two years will simistic scenario, that is, the unit price falls to $350 after two years will occur will change unit will result to negative NPV thus making the project un viable to invest in as a result of no vage of plant after 4 years Case: You are a team of financial analysts of the Gadget Division of The FGM Corporation, the largest multinational a production of a new voice-activated electronic device - Universal Direction Assistance (UDA). This upgradeabl directions and real time traffic reports that guide automobile drivers in choosing the preferred route to their d geographical information and real time traffic report (where technology is available) that are translated into th comprehensive market analysis on the potential demand for this device was conducted last year at a cost of $ According to the results of the market analysis, the expected annual sale volumes of UDA are 1.8M units for th expected to be $600 for the first two years, and then fall to $450, due to the introduction of similar devices by growth rate for unit production costs are expected to be 4% per year over the remaining life of the project . In addition, the implementation of the project demands current assets to be set at 12% of the annual sale re UDA will increase the sales volume of cars and trucks that leads to an increase in the annual after-tax cash flow The production line for UDA will be set up in a vacant plant that was built by FGM at a cost of $30M twenty ye termination of this project for $12M in four years. The machinery for producing UDA has an invoice price of $1 classified in the MACR 3-year class for depreciation purpose. The 5 machinery is expected to have zero salvage be 15%. The estimated marginal tax rate of The FGM Corporation is 30%. I need the answer for the following question after performing the calcu Question: Write a short memo to the Director of the Gadget Division, Mr. Ben Black, to present your tea Be sure to address the following questions on your memo. 1. In light of the appropriate objective of a firm, what would you recommend on the UDA Project basing on th 2. Would your recommendation be changed if the unit price of the UDA only falls to $550 upon the entrance o price falls to $350 after two years? Why? 3. What would be your recommendation on this UDA Project if there is 75% chance that the base scenario (i.e only falls to $550 after two years) will occur, and 5% chance that the pessimistic scenario (i.e., unit price falls t e largest multinational automobile manufacturer in the world. You are asked to evaluate a project proposal regarding the (UDA). This upgradeable device, which incorporates the most advanced computer and satellite wireless technology, provide referred route to their destinations. This device can be used in any country with specialized software that contains local hat are translated into the chosen language of the driver. UDA will be sold as an option for the FGM cars and trucks. A d last year at a cost of $10M. DA are 1.8M units for the first two years, and drop to 1.5M units for the final two years of this 4-year project. Unit prices are on of similar devices by competitors, afterwards. Unit production costs are estimated at $500 in the first year of the project ng life of the project 2% of the annual sale revenues, and current liabilities to be set at 8% of the annual production costs. Besides, the introductio nnual after-tax cash flow of FGM by $21M. cost of $30M twenty years ago. This fully depreciated plant has a current market value of $20M, and is expected to be sold as an invoice price of $120M, and its modification costs another $15M. The machinery has an economic life of 4 years, and ted to have zero salvage value at the termination of the project. The cost of capital (or discount rate) for this project is assum rming the calculations on excel on sheet number 2 ack, to present your team's analysis and conclusions. UDA Project basing on the (base) scenario described above? Why? 550 upon the entrance of competitive products after two years into this project? What would be your recommendation if th at the base scenario (i.e., unit price falls to $450 after two years) will occur, 20% chance that the optimistic scenario (i.e., un rio (i.e., unit price falls to $350 after two years) will occur? Why? oposal regarding the ess technology, provides that contains local ars and trucks. A r project. Unit prices are first year of the project. The Besides, the introduction of d is expected to be sold at the mic life of 4 years, and is for this project is assumed to r recommendation if the unit mistic scenario (i.e., unit price Gadget Division - UDA Proposal Machinery Costs ($) $ 120,000,000 Modification Costs ($) $ 15,000,000 Plant & Properties Opportunity Costs ($) $ 20,000,000 Salvage Value - Plant ($) $ 12,000,000 Salvage Value - Machinery ($) 0 Cost of Capital (%) 15% Tax Rate (%) 30% Positive side effect Operating Cash Flow ($) $ 21,000,000 Calculated the NPV and exptect NPV after perofming the calculations for base, optimisstic and pessimitic scenrio do Probability Net present value 75% $ 20% 5% Base Scenario Optimistic Scenario Pessimistic Scenario 22,953,660.80 $163,862,248.17 ($117,954,926.58) The below calculations must be done before calculating the NPV and expected NPV above BASE SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 Incremental net cash flows $ $ $ $ 40,501,350 94,503,150 44,995,500 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 Current Assets $ 129,600,000 Current Liabilities $ 72,000,000 Net Working Capital ($) $ 57,600,000 EBIT ($) Taxes ($) at 30% INCREMENTAL OPERATING CASH FLOWS, OCF ($) Add back Depreciation Net Working Capital ($) CHANGE in NET WORKING CAPITAL ($) $ - TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT ($) $ (149,000,000) $ 218,098,650 $ 22,953,660.80 NET PRESENT VALUE, NPV ($) OPTIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ (149,000,000) YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 Incremental net cash flows $ $ $ $ 40,501,350 94,503,150 44,995,500 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 218,098,650 EBIT ($) Taxes ($) at 30% INCREMENTAL OPERATING CASH FLOWS, OCF ($) Add back Depreciation Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT ($) $ NET PRESENT VALUE, NPV ($) $163,862,248.17 PESSIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ (149,000,000) YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 Incremental net cash flows $ $ $ $ 40,501,350 94,503,150 44,995,500 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 current assets $ 129,600,000 EBIT ($) Taxes ($) INCREMENTAL OPERATING CASH FLOWS, OCF ($) Add back Depreciation current liabiliities Net Working Capital ($) 72000000 $ - $ 57,600,000 $ 57,600,000 (149,000,000) $ 218,098,650 CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT ($) NET PRESENT VALUE, NPV ($) $ ($117,954,926.58) MEMO: Based on the above answers, the NPV of both the base and optimisti is negative. This means that the two scenerios, both optimistic and b Since the three tend to be mutually exclusive,then optimistic sceneri that is, it has the highest NPV. Depreciation Depreciation Book Rate Expenses ($) Value ($) 33.33% $ 44,995,500 $ 90,004,500 44.45% $ 60,007,500 $ 29,997,000 14.81% $ 19,993,500 $ 10,003,500 7.41% $ 10,003,500 0 Depreciable Costs $ 135,000,000 timisstic and pessimitic scenrio down below Expected Net present value $17,215,245.60 $32,772,449.63 ($5,897,746.33) YEAR 2 YEAR 3 1,800,000 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 450.00 $ 450.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 675,000,000 $ 675,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (156,193,500) $ $ $ $ $ 25,197,750 58,794,750 60,007,500 118,802,250 $ $ $ $ $ 21,000,000 $ $ $ $ $ (53,595,450) (125,056,050) 10,003,500 (115,052,550) $ 21,000,000 $ 21,000,000 129,600,000 $ 81,000,000 $ 81,000,000 $ 74,880,000 $ 64,896,000 $ 67,491,840 $ 54,720,000 $ 16,104,000 $ 13,508,160 2,880,000 $ (38,616,000) $ (2,595,840) $ (46,858,050) (109,335,450) 19,993,500 (89,341,950) 10,003,500 (178,651,500) $ $ 142,682,250 $ YEAR 2 (106,957,950) $ YEAR 3 1,800,000 (96,648,390) YEAR 4 1,500,000 1,500,000 $ 600 $ 550 $ 550 $ 520 $ 541 $ 562 $ 1,080,000,000 $ 825,000,000 $ 825,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (6,193,500) $ 10,003,500 (28,651,500) $ $ $ $ 25,197,750 58,794,750 60,007,500 118,802,250 $ 21,000,000 $ 54,720,000 $ $ $ $ $ (1,858,050) (4,335,450) 19,993,500 15,658,050 $ $ $ $ (8,595,450) (20,056,050) 10,003,500 (10,052,550) ### $ 21,000,000 $ 34,104,000 $ 31,508,160 2,880,000 $ (20,616,000) $ (2,595,840) $ $ 142,682,250 YEAR 2 $ 16,042,050 $ YEAR 3 1,800,000 8,351,610 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 350.00 $ 350.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 525,000,000 $ 525,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (306,193,500) $ $ $ $ $ 25,197,750 58,794,750 60,007,500 118,802,250 $ 21,000,000 $ 129,600,000 $ $ $ $ $ 74880000 (91,858,050) (214,335,450) 19,993,500 (194,341,950) 10,003,500 (328,651,500) $ $ $ $ (98,595,450) (230,056,050) 10,003,500 (220,052,550) ### $ 21,000,000 63,000,000 $ 63,000,000 64896000 67491840 $ 54,720,000 $ (1,896,000) $ (4,491,840) $ 2,880,000 $ (56,616,000) $ (2,595,840) $ 142,682,250 $ (229,957,950) $ (201,648,390) PV of both the base and optimistic scenerio is positive while that of pessimistic scenerio o scenerios, both optimistic and base can be proceeded with since higher returns are guaranteed. exclusive,then optimistic scenerio is the one that should be undertaken since it guarantees the highest return , highest return , Gadget Division - UDA Proposal Machinery Costs ($) $ 120,000,000 Modification Costs ($) $ 15,000,000 Plant & Properties Opportunity Costs ($) $ 20,000,000 Salvage Value - Plant ($) $ 12,000,000 Salvage Value - Machinery ($) 0 Cost of Capital (%) 15% Tax Rate (%) 30% Positive side effect Operating Cash Flow ($) $ Probability NPV 75% 20% 5% Base Scenario Optimistic Scenario Pessimistic Scenario 21,000,000 ($20,150,850.69) $97,085,951.63 ($137,390,054.38) BASE SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 EBIT ($) Taxes ($) Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) ($20,150,850.69) OPTIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 EBIT ($) Taxes ($) Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) $97,085,951.63 PESSIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 EBIT ($) Taxes ($) Net Working Capital ($) CHANGE in NET WORKING CAPITAL ($) $ - TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) (149,000,000) $ ($137,390,054.38) 102,898,650 Depreciation Depreciation Book Rate Expenses ($) Value ($) 33.33% $ 44,995,500 $ 90,004,500 44.45% $ 60,007,500 $ 29,997,000 14.81% $ 19,993,500 $ 10,003,500 7.41% $ 10,003,500 0 Depreciable Costs $ 135,000,000 Expected NPV YEAR 2 1,800,000 YEAR 3 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 450.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 675,000,000 $ 675,000,000 $ 936,000,000 $ 811,200,000 $ 843,645,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (156,193,500) $ 10,003,500 (178,648,500) $ $ 25,197,750 $ 118,802,250 $ (46,858,050) $ (89,341,950) $ (53,594,550) (115,050,450) ### $ 21,000,000 $ 21,000,000 $ 54,720,000 $ $ (2,880,000) $ $ 142,682,250 $ 16,104,000 ### $ 13,508,400 (38,616,000) $ (2,595,600) $ 5,804,400 (29,725,950) $ (85,650,450) Sulvage of plant after 4 years YEAR 2 1,800,000 YEAR 3 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 550.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 825,000,000 $ 825,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (6,193,500) $ 10,003,500 (28,651,500) $ $ 25,197,750 $ 118,802,250 $ (1,858,050) $ 15,658,050 $ (8,595,450) (10,052,550) $ 21,000,000 $ 21,000,000 $ 21,000,000 $ 54,720,000 $ 34,104,000 $ 31,508,160 $ (2,880,000) $ (20,616,000) $ (2,595,840) $ 5,804,160 $ 19,347,450 $ 142,682,250 $ 57,274,050 ### YEAR 2 YEAR 3 YEAR 4 1,800,000 1,500,000 1,500,000 $ 600.00 $ 350.00 $ 520.00 $ 540.80 $ 562.43 ### $ 1,080,000,000 $ 525,000,000 $ 525,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (306,193,500) $ 10,003,500 (328,651,500) $ $ 25,197,750 $ 118,802,250 $ (91,858,050) $ (194,341,950) $ (98,595,450) (220,052,550) $ 21,000,000 $ 21,000,000 $ 21,000,000 $ 54,720,000 $ (1,896,000) $ (4,491,840) $ (2,880,000) $ (56,616,000) $ (2,595,840) $ 142,682,250 $ $ 5,804,160 (116,725,950) $ (190,652,550) vage of plant after 4 years Gadget Division - UDA Proposal Machinery Costs ($) $ 120,000,000 Modification Costs ($) $ 15,000,000 Plant & Properties Opportunity Costs ($) $ 20,000,000 Salvage Value - Plant ($) $ 12,000,000 Salvage Value - Machinery ($) 0 Cost of Capital (%) 15% Tax Rate (%) 30% Positive side effect Operating Cash Flow ($) $ Probability NPV 75% 20% 5% Base Scenario Optimistic Scenario Pessimistic Scenario 21,000,000 ($20,150,850.69) $97,085,951.63 ($137,390,054.38) BASE SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 EBIT ($) Taxes ($) Net Working Capital ($) $ CHANGE in NET WORKING CAPITAL ($) - TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) ($20,150,850.69) OPTIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) $ 149,000,000 YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 EBIT ($) Taxes ($) Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) $97,085,951.63 PESSIMISTIC SCENARIO (Most Common Approach for OCF) Initial Cash outflow ($) YEAR 1 Annual Sales Volume (units) 1,800,000 Unit Price ($) $ 600.00 Unit Production Costs ($) $ 500.00 Incremental Revenues ($) $ 1,080,000,000 Incremental Costs ($) $ 900,000,000 Depreciation ($) $ $ 44,995,500 135,004,500 EBIT ($) INCREMENTAL OPERATING CASH FLOWS, OCF ($) $ $ 40,501,350 139,498,650 POSITIVE SIDE EFFECT OPERATING CASH FLOW ($) $ 21,000,000 $ 57,600,000 $ 57,600,000 (149,000,000) $ 102,898,650 Taxes ($) Net Working Capital ($) $ - CHANGE in NET WORKING CAPITAL ($) TERMINAL CASH FLOW ($) INCREMENTAL CASH FLOW TO PROJECT$ NET PRESENT VALUE, NPV ($) ($137,390,054.38) Memo. My recommendation on the UDA Project basing on the (base) scenario descr undertaken at the stated selling prices as well as the cost price since the NPV guaranteed returns yields to the investors. My recommendation will be changed by the unit price of the UDA fall to $55 two years into this project since even after the entrace of the competitor and f meaning that returns are guaranteed, that is, there will be value for money on My recommendation on this UDA Project when there is 75% chance that the after two years) will occur, 20% chance that the optimistic scenario, that is, th occur and 5% chance that the pessimistic scenario, that is, the unit price falls since this fall in price to 350 per unit will result to negative NPV thus making returns will be yielded on the investment. Depreciation Depreciation Book Rate Expenses ($) Value ($) 33.33% $ 44,995,500 $ 90,004,500 44.45% $ 60,007,500 $ 29,997,000 14.81% $ 19,993,500 $ 10,003,500 7.41% $ 10,003,500 0 Depreciable Costs $ 135,000,000 Expected NPV YEAR 2 1,800,000 YEAR 3 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 450.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 675,000,000 $ 675,000,000 $ 936,000,000 $ 811,200,000 $ 843,645,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (156,193,500) $ 10,003,500 (178,648,500) $ $ 25,197,750 $ 118,802,250 $ (46,858,050) $ (89,341,950) $ (53,594,550) (115,050,450) ### $ 21,000,000 $ 21,000,000 $ 54,720,000 $ $ (2,880,000) $ $ 142,682,250 $ 16,104,000 ### $ 13,508,400 (38,616,000) $ (2,595,600) $ 5,804,400 (29,725,950) $ (85,650,450) Sulvage of plant after 4 years YEAR 2 1,800,000 YEAR 3 YEAR 4 1,500,000 1,500,000 $ 600.00 $ 550.00 $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 825,000,000 $ 825,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (6,193,500) $ 10,003,500 (28,651,500) $ $ 25,197,750 $ 118,802,250 $ (1,858,050) $ 15,658,050 $ (8,595,450) (10,052,550) $ 21,000,000 $ 21,000,000 $ 21,000,000 $ 54,720,000 $ 34,104,000 $ 31,508,160 $ (2,880,000) $ (20,616,000) $ (2,595,840) $ 5,804,160 $ 19,347,450 $ 142,682,250 $ 57,274,050 ### YEAR 2 YEAR 3 YEAR 4 1,800,000 1,500,000 1,500,000 $ 600.00 $ 350.00 ### $ 520.00 $ 540.80 $ 562.43 $ 1,080,000,000 $ 525,000,000 $ 525,000,000 $ 936,000,000 $ 811,200,000 $ 843,648,000 $ $ 60,007,500 $ 83,992,500 $ 19,993,500 $ (306,193,500) $ 10,003,500 (328,651,500) $ $ 25,197,750 $ 118,802,250 $ (91,858,050) $ (194,341,950) $ $ 21,000,000 $ 21,000,000 $ 21,000,000 $ 54,720,000 $ (1,896,000) $ (4,491,840) $ (2,880,000) $ (56,616,000) $ (2,595,840) $ 5,804,160 (116,725,950) $ (190,652,550) $ 142,682,250 $ (98,595,450) (220,052,550) Project basing on the (base) scenario described above is that the project should NOT be ices as well as the cost price since the NPV obtained is negative meaning that there is no ged by the unit price of the UDA fall to $550 upon the entrance of the competitive products after ven after the entrace of the competitor and fall in price, the NPV will now positive ed, that is, there will be value for money on the investment. A Project when there is 75% chance that the base scenario, that is, the unit price falls to $450 hance that the optimistic scenario, that is, the unit price only falls to $550 after two years will simistic scenario, that is, the unit price falls to $350 after two years will occur will change unit will result to negative NPV thus making the project un viable to invest in as a result of no vage of plant after 4 years