For questions 8 through 12 please use the Business Investment proposal described below. Bornholdt Companies, Inc.. (BCI) manufactures cell phones and is evaluating the economics of expanding its manufacturing facility to enable it to take on a new business customer contract for the next 4 years. Last year, the company paid Johnson Wilkins Engineering LLV (JWE) $150,000 to do an extensive construction alternatives analysis for the proposed new facility. The current expansion scenario would have total construction costs of $3.4 million and it would take about 90 days to complete (i.e., essentially upfront). The Company would also put in $1.5 million of new machinery. Inventory (raw materials, work-inprocess, finished goods) investment needed for the expansion would be $685 thousand. Annual depreciation associated with the expansion would be $200 thousand per year for the next four years. The company expects to borrow 100% of the upfront costs and thereby incur $1.7 million in total interest expense over the life of the project, and the companys accountants say this interest expense can be capitalized into the cost of the project. Incremental sales for this project are estimated to be $2.2 million for Year 1; $2.9 million for Year 2; $3.1 million for Year 3; and $2.2 million for Year 4. Cost of goods sold is estimated to be approximately 60% of total sales, and additional fixed costs are estimated to be $350 thousand per year. At the end of the projects estimated life in Year 4, the company estimates it will be able to sell excess capital assets for $425,000 and the expected the book value for these items would be $220,000. Also at the end of the project, $130,000 of remaining inventory could be liquidated at cost. The weighted average cost of capital is 16%, its ordinary income tax rate is 35%, and its capital gains tax rate is 15%. Answers: Year 0 Year 1 Year 2 Year 3 Year 4 Construction ($3,400,000) Machinery ($1,500,000) Inventory ($ 685,000) Sales $2,200,000 $2,900,000 $3,100,000 $2,200,000 COGS ($1,320,000) ($1,740,000) ($1,860,000) ($1,320,000) Fixed Costs ($ 350,000) ($ 350,000) ($ 350,000) ($ 350,000) Depreciation ($ 200,000) ($ 200,000) ($ 200,000) ($ 200,000) EBT $ 330,000 $ 610,000 $ 690,000 $ 330,000 Income Taxes (35%) $ ________ ($ ) ($ ) ($ ) Net Income $ $ $ $ 00 Addback Depreciation $ 200,000 $ 200,000 $ 200,000 $ 200,000 Operating Cash Flow $_________ $_________ $_________ $________ Terminal Year: Sell Capital Assets: MV (A) $ 425,000 BV of Capital Assets ($ 220,000) Taxable Gain $ 205,000 Capital Gain Tax (15%) (B) ($ 30,750) After-Tax Salvage Value (A less B) $ 394,250 Liquidate Excess Inventory $ 130,000 Terminal Year-Specific Items Cash Flow $__________ ____________ ___________ __________ __________ Total ($5,585,000) $ 414,500 $ 596,500 $ 648,500 8. What is the Total Upfront Cash Flow for this proposed project? a. $ 5,605,000 b. $(5,585,000) c. $(7,285,000) d. $(7,435,000) e. $(6,605,,000) Answer: b 9. What is the Total Annual Cash Flow for Year 3? a. $ 927,300 b. $ 935,500 c. $ 650,500 d. $ 648,500 e. $(590,500) Answer: d 10. What is Terminal Year-specific Cash Flow (i.e., excluding the Annual Operating Cash Flow portion)? a. $ 174,250 b. $ 524,250 c. $ 589,100 d. $ 550,000 e. $ 892,850 Answer: b 11. Is(Are) there any irrelevant cash flow(s) mentioned in this problem? If so, what is(are) it(they)? a. No. There are none. b. Yes; the engineering study. c. Yes; the interest expense. d. Yes; the interest expense and the engineering study. e. Yes; the interest expense, the dividends, and the engineering study.