Deadline: Nov 26, 2021 (11:59 pm) You may work on this project individually or in groups of 2. The completed project should be submitted on a spreadsheet showing all the formulas used to compute the numbers.

Adams Industrial is a leading manufacturing corporation. The company produces a wide range of products ranging from pipes to aircraft engines. The company is considering a new project to produce a new generation of PEX Pipe (cross-linked polyethylene pipe). PEX is a pipe that is rigid enough to withstand the pressures of water supply but flexible enough to weave throughout walls, ceilings, and basements.

The corporation is considering investing $10 million in research and development over a 1-year period. Based on the results, it will invest more than $100 million in the project. The initial cost includes the following:

1. $50M: 100 new KPM1200 machines. Price per machine is $500,000. The machines will depreciate to $1M over a 20-year period using straight line depreciation. However, the company expects to sell the machines for a combined value of $1.5M.

2. $40M: Building a 350,000 square feet factory in Hickory, NC. The company will build the factory on a 12-acre property that it owns. If the company doesnt proceed with the project it expects to sell the land for $750,000. If the company proceed with the project, it expects the value of the land and the factory to be $15 million after 20 years from the start date of the project (ignore the effect of the depreciation of the factory). The land was initially bought 5 years ago for $450,000 from the heirs of Richard Andersson. However, one of the heirs has filed a lawsuit against Adams Industrial following the purchase of the land. Whether the corporation undertakes the project or not, it will pay $75,000 to settle this litigation. Finally, the corporation will have to pay $100,000 to NC state to get the required licenses to build and operate the factory.

3. $10M: Additions to the NWC. The level of NWC will change based on the schedule in the Excel file. After 20 years, the company will recover the full value of the NWC related to this project.

The corporation expects to sell:

• 2,000,000 units per year over the first 5 years of the project.
• 2,250,000 units per year over the next 10 years.
• 1,500,000 units per year over the last 5 years.

The selling price is expected to be $15 per unit over the first four years of the project. The price is expected to increase by 2% per year over the next 16 years. The fixed cost of production is expected to be $2.5 million per year while the variable cost of production is expected to be $4 per unit. PEX pipes are mainly made of cross-linked HDPE (high density polyethylene). The cost of polyethylene represents 75% of the variable cost. Due to the increasing demand on polyethylene, its price is expected to increase by 3% per year over the first 5 years and by 6% over the remaining 15 years.

While the other components are expected to only increase by 2.5% per year. The new product will have a negative effect on the sales volume of its similar products such as the PVC, Cooper, and ABS pipes. The corporation expects the effect to range from $750,000 during the first 10 years to $500,000 for the last 10 years.

The current corporate tax rate is 21%.

1. On a spreadsheet, compute the annual cash flows of the project from year 1 till year 21. Each year identify the: Net Capital Spending, the Change in NWC and the Operating Cash Flow.

2. Determine whether the project should be accepted or rejected based on each of the following capital budgeting techniques (do not consider the R&D expenses in your analysis): a. Payback Period (cutoff period: 5.5 years).

a. Discounted Payback Period (cutoff period: 8 years).

b. Net Present Value (discount rate = 10%).

c. Internal Rate of Return (discount rate = 10%).

d. Profitability Index (discount rate = 10%).

3. Taking into consideration the R&D phase and assuming that the probability of R&D success is 80%, compute the NPV of the project in year 0.

4. Perform a sensitivity analysis for the following variables:

a. 10% in the number of units sold.

b. 10% in the price per unit.

c. 10% in the variable cost per unit.

d. 10% in the fixed cost of production.

5. Perform a scenario analysis based on the following scenarios:

a. Higher Tax Scenario: The tax rate becomes 28% starting in year 1.

b. Best Case Scenario: The number of units sold is 10% higher, the price is 4% higher, the variable cost of production is 1% lower, and the fixed cost of production is 5% lower.

c. Worst Case Scenario: The number of units sold is 15% lower, the price is 5% lower, the variable cost of production is 5% higher, and the fixed cost of production is 8% higher.

6. An executive of Adams Industrial proposed investing an additional $5 million in R&D in order to increase the probability of success to 95%. Issue a final recommendation report for Adams Industrial that includes the following:

a. A recommendation on whether to go ahead with the R&D expenditures or not.

b. A recommendation on whether to invest $10 million or $15 million in R&D.

c. The most critical variables that may affect the success or failure of the project.