BayFood Inc. is considering a proposal to manufacture high$-$end protein bars used as food

supplements by body builders. The project requires use of an existing warehouse, which the

firm acquired four years ago for $$2m$ and which it currently rents out for $$300,000$ per year.

Rental rates are not expected to change going forward. In addition to using warehouse, the

project requires an up$-$front investment into machines and equipment of $$2\mathrm{.}4m,$ which can be

depreciated straight$-$line to zero over its $4-$year useful life. BayFood expects to end this project

at the end of four years and sell machines and equipment for $$600,000.$

The protein bars will sell for $$5$ per unit in year $1,$ growing at $10$ percent per year. The total

variable cost to manufacture each unit of product is $$2$ and will remain constant in the next

four years. While the managers expect to sell $500,000$ unit of protein bars per year, estimates

range from $200,000$ to $800,000$ given the uncertainty in demand. The project will require

additional sales and administrative personnel at a cost of $$400,000$ per year. The increased

production will require additional inventory on hand of $$1$ million to be added in year $0$ and be

recovered in year $4.$

BayFood's marginal tax rate is $25$ percent, and its required rate of return is $15$ percent.

$($a$)$ What is the NPV in the worst case? Evaluate the project based on the uncertainty

involved in project appraisal and make suggestions to BayFood's managers.

$(17$ marks$)$

$($b$)$ Discuss the Modigliani$-$Miller dividend irrelevance proposition and its assumptions.

$(8$ marks$)$