Matzz ASA is trying to decide whether to launch a new household product. The owner has delegated to her assistant Mary Best to perform a DCF analysis together with a preliminary recommendation. The product is assumed to have a limited project life; and in the analysis, Mary has used an economic life of 6 years. Marys analysis is presented in the Appendix it is also available as a downloadable Excel-file. The corporate tax rate is 20%. The product launch would require investments in some special-purpose equipment costing 17 million and the disposal value at the end of the six years is 7.4 million. Based on previous experiences, Matzz suspects that tax authorities will require an economic life of ten years, but the equipment can be used for twenty years. In addition, the equipment needs to be installed and Mary expects that internal costs amount to 6 million of which 3 million has already been invested. The household product will be produced in an old production facility that Matzz currently owns. It has a book value of 2 million and it is depreciated on a straight-line basis at 0.5 million per annum. The production plant is currently rented out as a garage to a local bus company. The contract with the bus company stretches over the next eight years, giving Matzz cash inflows of 0.3 million, but carries a mutual cancellation clause of 0.5 million. The market value of the production facility is estimated at 5 million but Matzz does not intend to sell the premises within the next decade. Launching a new household product will require substantial sales-promotion activities. These cash outflows are included in the calculations of operating cash flows (next paragraph), with the exception of extraordinary sales-promotion activities in years 1 and 2 of 1.2 million and 1 million. The net operating cash inflow is the by-far most difficult line item to forecast. Together with the sales department, Mary has arrived at the following sales figures:

Year Volume Price Cash flows CFs after tax

1 300,000 30 9,000 7,200

2 400,000 25 10,000 8,000

3 300,000 20 6,000 4,800

4 200,000 18 3,800 3,040

5 150,000 18 2,850 2,280

6 75,000 18 1,425 1,140

1,425,000 33,075 26,460

Matzz long-term borrowing rate is 5 %, and the cost of equity is 11%. Because the target debt-equity ratio is 1/1, and therefore Mary calculates with a WACC of 8 %. Your overall task is to assess the investment project correctly. The project appears to be unprofitable, but has Mary done everything right? Make, and comment upon, potential improvements to the investment analysis. You may change numbers and calculations, as well as add missing line items, if necessary. A good way of answering the question is to edit the Excel spreadsheet and then copy/paste a picture of the new spreadsheet into your answering document. Do not forget to comment on your changes and whether Matzz should make the investment or not.