Capital Budgeting Analysis Wholesome Foods Inc. (WFI) projects unit sales for its new Organic Trail Mix as follows: Year Unit Sales Year 1 70,000 Year 2 100,000 Year 3 110,000 Year 4 100,000 Year 5 65,000 Production of the trail mix will require $5 million in net working capital to start and additional net operating working capital investments each year equal to 30 percent of the projected sales increase (in $ s) for the following year. (Because sales are expected to fall in the fifth year of sales, there is no additional investment in NOWC for that year). Total fixed costs are $1,000,000 per year, variable production costs are $235 per unit, and the units are priced at $350 each. The equipment needed to begin production is $15 million. The manufacturing equipment needed to make the Trail Mix falls into class 8 for tax purposes (20 percent). Assume at the end of year 5. This equipment can be sold for its scrap value of $1 million. WFIs optimal capital structure is 35% debt, 55% common equity, and 10% preferred shares. According to its calculations, WFI expects the required return on debt (before tax) to be 10%, on preferred shares 16% and on common equity 22%. Since the company has significant capital in retained earnings, it will not allocate any flotation costs to this project. WFI is in the 30 percent marginal tax bracket, and this project is considered an average risk compared to previous investments. Note: Utilize the formula for calculating the PV of the CCA tax shield rather than the year-by-year calculations, as it is more accurate.

1. Based on these preliminary project estimates, what is the projects Net Present Value?

2. Calculate the projects Profitability Index, Internal Rate of Return and Payback period.

3. Calculate the project's discount Payback period?

4. Based on this analysis, what would you recommend to DBP? Discuss any other factors in this course that could affect this decision. Could these additional factors be incorporated into the analysis? Explain.