Complete the incremental cash flows work sheet for each project.

You are provided with an Excel worksheet for each project that lists the initial variable costs per unit, total fixed costs, depreciation expense and number of units sold. These are incurred on a quarterly basis (i.e. m = 4).

The sales price and almost all associated costs and expenses are expected to grow at an annual rate of 3% per year over the life of each project. Depreciation expense will remain constant.

The number of units sold for Project 1 is expected decrease at an annual rate of 7.5000%. The number of units sold for Project 2 is expected increase at an annual rate of 9.5000%. The number of units sold for Project 3 is expected increase at an annual rate of 4.000%.

The profits of all projects are taxed at an annual rate of 35%.

Each project is expected to last three years. The estimated future cash flows are recognized at the end of each quarterly period.

Ensure that Units Sold figures are integers (whole numbers).

Complete the worksheet entitled Profile.

Copy the incremental cash flows (from the incremental cash flow worksheets) for each project into the appropriate cells.

Fill out the project NPV columns by computing NPV at each different discount rate. The profiles for each project will automatically be generated on the chart provided.

Complete Sheet 6 by computing the WACC of the firm and the IRR and Discounted Payback Period for each project.

WACC: The capital structure for the firm as well as all the inputs needed to compute the component costs are provided. Compute the component costs and the WACC in the indicated cells.

IRR: Use the IRR function. Since the future cash flows occur on a quarterly basis, the value produced by the IRR function is a quarterly rate. Convert this value to an annual rate.

DPB: Since the cash flows are quarterly, the DPB function on the TI BA II Plus Professional wont produce an accurate value. You must compute the DPB by discounting each cash flow to t = 0 then computing the net cumulative cash flows for each time period until you find the payback point. Express the DPB in years.

After you have completed Sheet 6, copy it and title the copy Sheet 6 Formulas. While on this worksheet, click on the Formulas tab and select the Show Formulas option. This will display all the formulas you used for your calculations.

Recommend a project on Sheet 5.

Discuss any observations and reservations concerning your computations. Include a discussion on the following issues:

Reliability of the IRR calculations.

Possible impact that a change in the firms WACC may have on the decision.

a. Assume that the yield curve is currently upward sloping and is expected to remain so for the foreseeable future.

b. Assume that you firms minimum WACC will be at least 3.0000% and its maximum WACC will be no more than 15.0000% during the life of these projects

Relative riskiness of the projects.

Project 1
Period	0	1	2	3	4	5	6	7	8	9	10
Variable Costs per Unit
Raw Materials		$9.00
Manufactured Components		$22.00
Purchased Components		$35.00
Labor		$22.00
Internal Transp. & Storage		$0.50
Energy		$1.25
Total Variable Costs Per Unit		$89.75
Sales Price Per Unit		$150.25
Units Sold		30,000
Total Sales		$4,507,500
Total Variable Costs		$2,692,500
Total Fixed Costs		$90,000
Total COGS		$2,782,500
Gross Profit		$1,725,000
Gen, Sales & Admin Expense		$5,000
Depreciation		$40,000
EBIT(Earn. Before Int. & Tax)		$1,680,000
Income Tax		$588,000
Incremental Earnings		$1,092,000
Depreciation Add Back		$40,000
Incremental Free Cash Flow	-$5,485,000	$1,132,000

Declare your recommendation and your supporting rationale. Your rationale should address the decision criteria which you generated in previous parts of this project.