FASTOUT Corporation is an automation company that invests heavily in research and

development (R&D) before introducing any new machine, which are mostly innovative labour

saving alternatives. Manufacturing firms in the industry are customers of FASTOUT

Corporation. Recently, FASTOUT spent $130,000 to innovate an automatic food processing

machine AFP20 to reduce wastage; however, the machine AFP20 is not fully ready yet for the

market due to its occasional imperfection in separating residue and fine output, as reflected in a

few random trial runs. Such infrequent failures require long reset time. Firms installing AFP20

may experience significant production loss during reset time. Nonetheless, due to the pressure

of severe competition, FASTOUT managers are planning to introduce this machine AFP20 in the

market before any new offer from competitors. The company is expecting that the final version

of reliable machine AFP20-M would be available for production in four years' time.

Required machineries for building the plant to manufacture machine AFP20 can be procured

from a local importer at a cost of $6,200,000. FASTOUT Corp. has to incur additional

transportation cost of $50,000 and installation costs of $250,000; whereas the local importer will pay the import duty of $500,000. The plant would have economic life of five years and will

be depreciated for tax purposes using straight line rate of 20 per cent per year. At the end of this

project, the plant would be transferred (i.e., sold) to another project at a price of $700,000.

The Marketing manager of FASTOUT Corp has projected that 300 units of the machine AFP20

can be sold in the first year and that sales will drop by 25 units every year during the life of the

project. Expected sales price would be $50,000 per unit. Variable cost of production is estimated

to be 60% of sales revenue as long annual production is at least 200 units. Fixed factory

overhead of $1,800,000 per year would be allocated to this production plant.

It is estimated that the project will require an initial investment in stock (inventory) of

$320,000. Moreover, $140,000 will be tied up with debtors (accounts receivables) due to

increasing sales; however, it would be partially offset by $60,000 increase in creditors (accounts

payable). The project manager has the plan to maintain the same level of net working capital

(NWC) throughout the life of the project (i.e., no further investment in NWC during the project

life) before final recovery of NWC at the end of four years. There will be pre-launching expenses

of $100,000 to be incurred initially for this project.

New plant will occupy a portion of factory space that is currently being used for storage

purposes in generating monthly net revenue of $10,000, but it will discontinue due to

installation of the plant. Furthermore, selling machine AFP20 will reduce FASTOUT's

automation consultation fee income by $50,000 per year where associated cost is 40 per cent of

such fee income.

Firms buying machine AFP20 from FASTOUT will ultimately replace many of their unskilled and

semi-skilled workers by a few skilled workers for improving production efficiency. An

Association of Labour Unions opposes the probable installation of AFP20 by the firms as many

workers will be losing their jobs due to not having sufficient skill. Considering the issue raised

by the Association, the managers of FASTOUT have identified another project that will produce

semi-automatic machine FP19, which will require both semi-skilled and skilled workers. Initial

total investment for this FP19 project would be the same as AFP20 project and projected future

cash flows (after all adjustments) for this five-year project would be as follows:

Year-1: $2,100,000; Year-2: $2,600,000; Year-3: $3,500,000;

Year-4: $3,300,000; Year-5: $1,400,000;

The company uses required rate of return considering its weighted average cost of capital

(WACC) that varies from 14 to 19 per cent in recent time. Management has decided to use both

rates to evaluate this project. Corporate tax rate is 30%. FASTOUT uses a target discounted

payback period of 3.5 years.

Before taking final decision in the upcoming meeting, the Chief Financial Officer (CFO) of

FASTOUT Corp requires a clear explanation of all relevant issues relating to the machine AFP20

project. The CFO also asks for a FORMAL REPORT with detail analysis of cash flows and

explanations of results using appropriate capital budgeting methods that are usually used in

evaluating projects.

Furthermore, in a separate section in the report, the CFO is interested to review the details of

the comparison between AFP20 and FP19 projects with respect to the results of appropriate

capital budgeting methods using both 14 and 19 per cent required rates, crossover rate and all

relevant factors that can assist in taking final decision.

Using Excel Spreadsheet (as explained in the eLearning video of Week-6), full analysis

to be presented to the CFO of FASTOUT Corp. in evaluating whether either project should be

started or not. Your analysis should include the following

Table of cash flows (Show all digits, do not convert amounts to $ in million or thousand)