Nasco Heating Inc., a producer of heating equipment in Michigan, is currently evaluating the introduction of a new infrared space heater. Several of Nascos competitors have already entered the quartz infrared market in response to the publics demand for heating devices that provide soft, moist, safe heat without reducing oxygen and humidity in the heated area. As a result, industry analysts predict high growth in the sales of infrared heaters in the years to come. Production facilities for the proposed project will be housed in a currently unused section of Nascos plant; this section must be renovated upon commencement of the project at a cost of $350,000. If it is not used for the project, a local company has asked to lease this section of Nascos plant for an after-tax amount of $120,000 a year for the next four years. The required production machinery costs $600,000; its shipping cost is estimated to be $10,000, while its installation cost is $40,000. The machinery falls in the 5-year MACRS class, and its salvage value is estimated to be $100,000 after four years of use. In addition, in each of the four years of its life the project will require net working capital level equal to five percent of the infrared heater revenues; this net working capital must be available at the end of the year prior to sales. Nasco expects to sell 400,000 units of the new heater in the first year of operations; thereafter unit sales are estimated to grow at a two and a half percent annual rate over the remaining three years of the projects life. If the project is undertaken, the first-year production costs and selling price would be $49.20 and $57.75 per heater, respectively; Nasco estimates that price will increase at a five percent annual rate while production costs will increase at half that rate over the remaining three years of the projects life. Nascos sales manager is concerned that the introduction of the infrared heater will cannibalize the sales of the firms existing technology (i.e., radiant and ceramic) heaters. She estimates that existing heater sales will decline by $2,000,000 in the first year, dropping by an additional two percent annually over the projects remaining life. As a result, Nascos production manager estimates that existing heater production costs will decline by $500,000 in the first year, falling by an additional one percent annually over the projects remaining life. Nascos discount rate for the project is 12 percent, while its tax rate is 21 percent.

1. You are in charge and expected to make a presentation to Nascos top-management regarding the merits of the infrared heater project. Given the above information, estimate the projects cash flows over its life and provide measures of the its desirability or lack thereof. (Explain in detail your calculations for years 0 and 4.)

2. From past experience, you know that Nascos management is interested in the different scenarios under which the projects NPV will be zero; i.e., the project will break even in terms of NPV. To be prepared, you would like to consider the following scenarios: i. All else the same, at what year 1 price per heater would the project break even? ii. All else the same, what is the sales volume (in heaters) in each of the next four years for which the project will break even?