Cargo Specialists is a leading producer of logistics and transportation systems. The

company is currently evaluating a new contemporary equipment of production logistics systems, which facilitates firms$$ activities and organizes more efficiently the activities time spent. Production facilities for the new production logistic equipment would be set up in an unused section of the company$$s main plant. Relatively inexpensive, used equipment with an estimated cost of only $440,000$ would be purchased, but shipping costs to move the equipment to Cargo Specialists plant would total $25,000,$ and installation charges would add another $30,000$ to the total equipment cost; shipping and installation costs will be involved in the overall equipment costs and will be depreciated alongside. Further, Cargo Specialists inventories $($raw materials, work$-$in$-$process, and finished goods$)$ would have to be increased by $15,000$ at the time of the initial investment. The equipment has a remaining economic life of $4$ years, and the company has obtained a special tax ruling that allows it to apply accelerated depreciation rates, as follows: $0\mathrm{.}5,0\mathrm{.}4,0\mathrm{.}3$ and $0\mathrm{.}2$ in Years $1$ through $4,$ respectively. The equipment will have been fully depreciated after $4$ years of use, but the management expects to sell it at a price of $70,000.$ The section of the main plant where the new production logistic would occur has been unused for several years, and consequently it has suffered some deterioration. Last year, as part of a routine facilities improvement program, Cargo Specialists spent $160,000$ to rehabilitate that section of the plant. Cargo Specialists$$ management expects to sell $120,000$ logistics software in each of the next

$4$ years, at price of $12\mathrm{.}00$ per item, of which $9\mathrm{.}50$ per item would be needed to cover fixed and variable cash operating costs. In examining the sales figures, the management expects that the new project would cut into the firm$$s sales of regular $($old$)$ logistic system $$ this type of effect is called cannibalization. Specifically, the sales manager estimated that regular logistics$$ system sales would fall by $150,000$ if the new system was introduced. However, this fall in production of the regular system would also lead to a respective fall in operating expenses by $70,000.$ Cargo Specialists$$ cost of capital is $13\%,$ and the company$$s tax rate is $21\%.$ Assume that Cargo Specialists will be a profitable company in the next $4$ years.

Questions

$1.$ The project will be financed in part by debt. Should the cash flow estimation include interest expenses? Explain.

$2.$ Should the $160,000$ that was spent to rehabilitate the plant be included in the analysis? Explain.

$3.$ Suppose another producer had expressed an interest in leasing the production site for $40,000$ a year. If this were true $($in fact, it was not$),$ how would that information be incorporated into the analysis?

$4.$ What is Cargo Specialists$$ Year $0$ net investment outlay on this project?

$5.$ What is the expected nonoperating cash flow when the project is terminated at Year $4?$

$6.$ Estimate the project$$s operating cash flows.

$7.$ Now assume that the sales price will increase by the $5$ percent inflation rate beginning after Year $0.$ However, assume that cash operating costs will increase by only $4$ percent annually from the initial cost estimate, because over half of the costs are fixed by long$-$term contracts. For simplicity, assume that no other cash flows are affected by inflation. Estimate the project$$s new operating cash flows.

$8.$ Evaluate the project for both sets of cash flows $($as calculated in questions $6$ and $7$ above$)$ according to its NPV$,$ IRR, Profitability Index, and Payback Period.