It is now in the third quarter of 2019 and Emoji Limited has just started evaluating the proposed acquisition of a new machine for its new production line. The machine's invoice price is $34 million. Emoji Limited required that the machine must be directly delivered to the specified location. The machine manufacturer agreed to do so, but at an expense of $50,000. Also, it would costan additional$300,000to modifythemachineforspecialuse and an additional

$150,000 for installation. The annual insurance cost for this machine is $50,000. The machine will be depreciated straight-line to zero over its 5-year operating life. The management of the company expects that the machine can be sold in the second-hand market for $5 million at the end of the project.

The new production line would be set up on an unused space in the company's main plant by the end of 2019. The company spent $750,000 in January 2019 to refurbish the site. Hence, the management will use this newly refurbished facility for operation from the beginning of 2020. The company also spent another $100,000 in February 2019 for a marketing study to determine the expected sales figures for the new production line. It is expected that the new production line would generate incremental sales throughout the 5-year operating life as follows:

Year

Estimated Sales (Units)

2020

64,000

2021

106,000

2022

87,000

2023

78,000

2024

54,000

The company can manufacture the new product for $205 each in variable costs. Each unit can be sold for $485. Fixed costs for the operation are estimated to run $5.1 million per year. The new production line will require $6.208 million in net working capital at the start. Subsequently, total net working capital at the end of each year will be about 20% of the sales revenue for that year. In the last year of the project, any net working capital remaining is assumed to be recoverable at the end of the year

If the company decided to go ahead with the project, it will have an obligation to pay an annual interest of $650,000 over the next three years starting from 2020. It will also need to pay a 7.28% preference share dividend annually for 1.12 million preference shares outstanding, each with $5.50 par value. The company currently has 1.354 million ordinary shares outstanding. The annual dividend of $0.25 per share will be paid in 2020 and the dividend is expected to grow at a constant rate of 5.0% per year thereafter.

The management of the company expects that the initial investment amount can be fully recovered before the termination of the project. The management also requires the minimum return on investment (ROI) of 18.0%. The company has a 28.0% corporate tax rate and it

cannot claim income tax credit if making loss. Its weighted average cost of capital is 12.0% and its reinvestment rate is 8.0%.

Using the above information provided, you are required to answer the following questions:

a)Calculate the project's capital spending and present your works in a table. [Hint: See Table 9.13 in Ross, Westerfield and Jordan (2017) for an

example.]

b)Prepare the pro forma income statements and calculate the operating cash flows (OCF) for the project. Present your works in a table. [Hint: See Tables

9.11 and 9.13 in Ross et al. (2017) for examples.]

c)Calculate the project's changes in net working capital and present your works in a table. [Hint: See Tables 9.12 and 9.13 in Ross et al. (2017) for

examples.]

d)Calculate the project's total cash flows and present your works in a table.

[Hint: See Table 9.14 in Ross et al. (2017) for an example.]

e)Calculate the project's net present value (NPV), internal rate of return (IRR), modified internal rates of return (MIRR) using all three approaches, average accounting return (MR), profitability Index (Pl), payback and discounted payback. Do these indicators suggest that the project should be undertaken?

Answer rating: 100% (QA)

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