Its now 2017, and El Cap Climbing Company (ECCC) has continued to grow. One of ECCCs major revenue-producing products is a spring-loaded camming device called SLCD, or cams. Its a device with a small handle (called the trigger) and two spring loaded cams on an axle. When the trigger is pulled, the cams move together, decreasing the size of the cams. Its then inserted into a crack or pocket in the rock. When the trigger is released, the cams expand. These cams are used as anchors when trad rock climbing.ECCC currently has one set of cams on the market, and sales have been excellent.The cams are lighter and perform better than their competitors. However, as with anyhigh-performance item, technology changes rapidly, and the cams are now falling behind the competition. ECCC spent $200,000 to develop a prototype for a new line of cams that has all thefeatures of the existing cams, but are made from an even lighter and stronger 7075-T6 aluminum alloy. The company has spent a further $150,000 for a marketing study to determine the expected sales figures for the cam line. ECCC can manufacture a set of the new cams for an average of $140 each in variable costs. Fixed costs for the operation are estimated to run an additional $2.1 million per yearif the new project is undertaken. The estimated sales volume is 75,000, 85,000, 80,000,70,000, and 65,000 per year for the next five years, respectively. The unit price of the new cam set will be $240. The necessary equipment can be purchased for $10.5 million and will be depreciated on a seven-year MACRS schedule. Its believed the value of the equipmentin five years will be $1.1 million. Production of the current cam line is expected to be terminated in two years. If ECCC doesnt introduce the new line of cams, sales will be 45,000 units and 25,000 units for the next two years, respectively. The price of the cam set is $150, with variable costs of $95 each, and fixed costs of $1.5 million per year. If ECCC does introduce the new cams, sales of the existing product will fall by 10,000 units per year, and the price of the existing sets should be lowered to $120 each. Net working capital for the cams will be 22 percent of sales and will occur with the timing of the cash flows for the year; for example, theres no initial outlay for NWC, but changes in NWC will occur in Year 1 with the first years sales. ECCC has a 30-percent corporate tax rate and a required return of 10 percent.

Leah has provided you with a data report in an Excel spreadsheet that contains information

to answer the following questions:

1.Whats the payback period of the project?

2.Whats the profitability index of the project?

3.Whats the IRR of the project?

4.Whats the NPV of the project?

5.Should Leah accept the project?

6.If Leah needs to adjust the price of the product, whats the lowest Leah could make the price of the new cam set and still have a positive NPV project (keeping all other

assumptions the same)?

Equipment	10,500,000
Pretax salvage value	1,100,000
R&D	200,000
Marketing study	150,000

		Year 1	Year 2	Year 3	Year 4	Year 5
Sales (units)		75,000	85,000	80,000	70,000	60,000
Sales of old product		45,000	25,000
Lost sales		10,000	10,000
Depreciation rate		14.29%	24.49%	17.49%	12.49%	8.93%
Price	240
VC	140
FC	2,100,000
Price of old product	150
Product price after reduction	120
VC of old product	95
Tax rate	30%
NWC percentage	22%
Required return	10%
Sales		Year 1	Year 2	Year 3	Year 4	Year 5
New		18,000,000	20,400,000	19,200,000	16,800,000	14,400,000
Lost sales		1,500,000	1,500,000
Lost revenue		1,050,000	450,000
Net sales		15,450,000	18,450,000	19,200,000	16,800,000	14,400,000
VC
New		10,500,000	11,900,000	11,200,000	9,800,000	8,400,000
Lost sales		950,000	950,000
Total VC		9,550,000	10,950,000	11,200,000	9,800,000	8,400,000
Sales		15,450,000	18,450,000	19,200,000	16,800,000	14,400,000
VC		9,550,000	10,950,000	11,200,000	9,800,000	8,400,000
Fixed costs		2,100,000	2,100,000	2,100,000	2,100,000	2,100,000
Dep		1,500,450	2,571,450	1,836,450	1,311,450	937,650
EBT		2,299,550	2,828,550	4,063,550	3,588,550	2,962,350
Tax		689,865	848,565	1,219,065	1,076,565	888,705
NI		1,609,685	1,979,985	2,844,485	2,511,985	2,073,645
+Dep		1,500,450	2,571,450	1,836,450	1,311,450	937,650
OCF		3,110,135	4,551,435	4,680,935	3,823,435	3,011,295
NWC
Beg		0	3,399,000	4,059,000	4,224,000	3,696,000
End		3,399,000	4,059,000	4,224,000	3,696,000	-
NWC CF		(3,399,000)	(660,000)	(165,000)	528,000	3,696,000
Net CF		(288,865)	3,891,435	4,515,935	4,351,435	6,707,295
BV of equipment						2,342,550
Salvage						6,100,000
Taxes on sale of equipment						(1,127,235)
Salvage CF						6,100,000
Cash flow on sale of equipment						4,972,765
Year	0	1	2	3	4	5
CF	(10,500,000)	(288,865)	3,891,435	4,515,935	4,351,435	11,680,060