Capital Budgeting Problem

Crystal Lake Company is considering launching a product line extension $-$ a "new and improved" version with

enhanced product features and enviromentally friendly packaging. Below are the basic assumptions

associated with the new product line extension:

Data:

Project life $4$ Years

Cost of equipment $ $(1,600,000)$

Year $0$ Incr. in Inventory $ $50,000$

Year $1$ Incr. in A$/$R $ $120,000$

Year $0$ Incr. in A$/$P $ $30,000$

NWC Inreases w$/$ sales after initial investment

Sales Year $1$ $ $1,500,000$ Sales increase per year $7\%$

Depreciation $ $(400,000)$

Operating costs $25\%$ of sales

G&A allocation from Corporate $ $(50,000)$

Year $1$ launch costs $ $(75,000)$

Prior year market research cost $ $(60,000)$

Inflation estimate per year $3\%($included in sales$)$

WACC $12\%$

Taxes $21\%$

After tax cash flows cannabilized from existing product line $-$ per year $ $50,000$

Proceeds for salvage value of equipment at end of $4$ years $ $150,000$

Questions:

$1)$ Create a cash flow framework by year and then calculate NPV$,$ IRR, Payback, MIRR, PI$.$

$2)$ Should you launch the line extension? Why?

$3)$ What is the risk associated with this project? How do you measure that risk?

$4)$ What do you know for certain about your forecast? How often will project assumptions change?

$5)$ What if the sales forecast changes to $10\%$ below the original estimate & the equipment cost is

$10\%$ higher?

$6)$ Are EVA $/$ ROIC metrics appropriate in this case?

$7)$ How should you handle inflation?