CASE 2 (40 points) You have been hired as a consultant for Divine Corporation, manufacturer of medical devices. The company projects unit sales for a new dental implant as follows: Year Unit Sales 1 2 2 3 4 73,000 86,000 97,000 68,000 Production of the implants will require 1,500,000 in net working capital immediately, all of which will be recovered at the end of the project. Total fixed costs are 4,200,000 per year, variable production costs are 255 per unit, and the units are priced at 375 each. The equipment needed to begin production has an installed cost of 8,500,000. This equipment qualifies as three-year MACRS property (depreciation rates are 33.33% for Year 1, 44.45% for Year 2, 14.81% for Year 3, and 7.41% for Year 4). In four years, this equipment can be sold for about 20 percent of its acquisition cost. The tax rate is 21 percent and the required return is 24 percent. The company imposes a payback cutoff of three years for its investment projects. Instructions: 1. Complete the pro forma and determine total cash flows for each year of project's life. (15 points) 2. Calculate the following investment criteria for the project: a. Payback period (5 points) ) b. Profitability Index (PI) (5 points) C. Internal rate of return (IRR) (5 points) d. Net Present Value (NPV) (5 points) 3. Explain your decision whether you recommend accepting or rejecting the project. (5 points) Year 0 1 2 3 4 Sales revenues Variable Costs Fixed Costs Depreciation EBIT Taxes Net income Operating Cash Flow Capital spending Net Working Capital After-tax salvage value Total Cash Flow