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	$ 2,500,000
Initial shipping charges for equipment	$20,000
Initial cost of installation of equipment	$15,000
Initial Increase in working capital	$100,000
Gross sales from the new product line in year 1	$ 1,250,000
Gross sales increase after year 1 (per year)	5%
Operating costs (as a % of gross sales)	30%
Market research before the start of the project	$ 75,000
Weighted average cost of capital	13%
Marginal corporate income tax rate	31%

It is estimated that the new product will cannibalize gross sales by an amount of $200,000 per year. The total net working capital will be 10% of gross sales for each year of the project's life. The new equipment is fully depreciated on a straight-line basis over the life of the project and is estimated to have a salvage value of $500,000 in 4 years.

Assignment

1. Prepare the cash flow forecast for this project in Excel. Your solution must use the cash flow format used in class and show all the components of the cash flows clearly. (83 points allocated across the components of the solution)
2. Using the cash flow forecast, calculate the NPV, IRR, Profitability Index, and Payback Period for the project. Your solution must show all calculations clearly. (3 points each for 12 points)
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. (5 points)