Mid-Michigan Manufacturing Inc. (MMMI) wishes to determine whether it would be advisable to replace an existing production system with a new automated one. They have hired you as a consultant to determine whether the new system should be purchased. The data you will need is as follows:

• MMMI has decided to set aproject timeline of 4 years.
• The new system will cost $3,200,000. It will be depreciated (straight line) over a five-year period (its estimated useful life), assuming a salvage value of $200,000 the amount the company will be writing the new system down to over its five-year expected life).
• The old system, which has been fully depreciated, could be sold today for $506,329. The company has received a firm offer for the system from Williamston Widgets, and MMMI will sell it only if they purchase the new system.
• Additional sales generated by the superior products made by the new system would be $3,000,000 in Year 1. In Years 2 and 3 sales are projected to grow by 4.5% per year. However, in Year 4 sales are expected to decline by 10% per year as the market starts to become saturated.
• Total expenses have been estimated at 74.0% of Sales.
• The firms tax rate 21%.
• MMMI requires a minimum return on the replacement decision of 8.5%.
• A representative from Stockbridge Sprockets has told MMMI that they will buy the system from them at the end of the project (the end of Year 4) for $600,000. MMMI has decided to include this in the terminal value of the project.
• The project will require $200,000 in additional Net Working Capital, 40% of which will be recovered at the end of the project.

Part 1: Base Case:

Complete the DCF Model using the above data, and calculate NPV and IRR. Note: A consultant has told MMMI that they have estimated there is a 50% chance that the base case will occur.

Part 2: Alternate Scenario 1:

The consultant has told the company that perhaps their sales growth expectations are a bit too high, and that they might have underestimated expenses. Assume that expenses as a percentage of sales will be 74.5% instead of 74.0% and that sales growth in Years 2 and 3 will be 4.3% instead of 4.5% (all other estimates remain the same). Recalculate NPV and IRR. Note: this scenario has a 25% chance of occurring.

Part 3: Alternate Scenario 2:

Reverting back to the Base Case estimates and assumptions, now assume that sales growth in Years 2 and 3 will be 5.0% each year instead of 4.5% (all other estimates remain the same). Recalculate NPV and IRR. Note: this scenario has a 10% chance of occurring.

Part 4: Alternate Scenario 3:

Revert back to the Base Case estimates and assumptions. Assume sales growth in Years 2 & 3 will be 4.3% instead of 4.5%, sales in Year 4 will only decline by 5% instead of 10%, and expenses as a percentage of sales will be 74.8% instead of 74.0% (all other estimates remain the same). Recalculate NPV and IRR. Note: this scenario has a 15% chance of occurring.