Mississippi Manufacturing Company is considering launching a product line extension which is a new and improved version with enhanced product features and environmentally friendly packaging.

Below are key estimates and assumptions associated with the project:

Project life (in years)	4
Initial cost of equipment	$ 2,275,000
Initial shipping charges for equipment	$10,000
Initial cost of installation of equipment	$15,000
Initial Increase in working capital	$140,000
Gross sales from the new product line in year 1	$ 1,200,000
Gross sales increase after year 1 (per year)	5%
Operating costs excluding the cost of launching (as a% of gross sales)	30%
Market research before to the start of the project	$ 60,000
Weighted average cost of capital	12%
Marginal corporate income tax rate	35%

The net working capital will be 10% of sales starting year 1. The new equipment is depreciated on a straight-line basis over the life of the project. It is estimated that the new product will result in the cannibalization of existing sales by an amount of $75,000 per year. The new equipment is estimated to have a salvage value of $150,000 in 4 years.

Assignment

1. Prepare the cash flow forecast for this project in Excel. Your solution must show all the components of the cash flows clearly.
2. Using the cash flow forecast, calculate the NPV and IRR of the project. Your solution must show the correct NPV and IRR calculations clearly.
3. Based on the above analysis, would you recommend the new product line extension? Justify your recommendation with a one-paragraph narrative. You must clearly state the justification.