Orange Computers has transformed into one of the largest smartphone companies in the world. Based on recent changes to the federal tax code, building phones in the US has become more attractive. Orange wants to build a single factory in either Pennsylvania, Texas, or North Carolina. Each state is offering incentives to woo Orange. Pennsylvania and Texas have proposed building a new facility, while North Carolina is offering grants to help renovate a recently closed factory. Build a workbook to calculate the net present value and internal rate of return (rounded to two decimal places) for each location over ten years using the information provided. Determine where Orange should locate their factory and give a brief explanation of why. Below are the pieces of information necessary to calculate the net present value and internal rate of return: 1. The factories in Pennsylvania and Texas could produce and sell 20 million phones annually, while the North Carolina factory could produce and sell 12 million. 2. Orange can sell all the phones produced at an average of $400 per phone in 2023. Orange forecasts that they can gradually raise the price of their phones by 2% per year over the next 10 years. 3. A new factory would be 5 million square feet at a cost of $160/ft to build in Pennsylvania or Texas. After grants, Orange would only need to pay $125/ft to renovate the existing 3 million square foot factory in North Carolina. 4. Pennsylvania will lease publicly owned land for the factory to Orange tax free, but the local government won't waive the 1% annual property tax which is calculated on the initial cost of the factory. The land in Texas will cost $20 million, and the local property tax is 0.5%, calculated based on the initial cost of the factory plus the cost of the land. Since there is an existing factory in North Carolina, there will be no cost in purchasing the land, and the state has agreed to pay the local property tax for 10 years. 5. Orange plans to spend $500 million on equipment for the new factories in Texas or Pennsylvania. Salvage value for the equipment after 10 years is expected to be 10% of the equipment's purchase price. North Carolina is offering to help pay for the equipment which lowers the cost to $300 million, but it has added a caveat that forces Orange to sell the equipment to the state for $1 when Orange disposes of the equipment after 10 years. 6. Orange can depreciate 100% of the cost of equipment when it's put into service for tax purposes. (Since salvage value will be taxed as a gain at the end of 10 years, do not subtract it from the equipment's value for depreciation.) All other depreciation will be on a straight-line basis over 15 years. (Don't forget that there is no depreciation on land.) 7. The federal income tax rate for Orange is 21%. In their pursuit of new manufacturing jobs, all three states have offered different incentive packages that result in a state income tax equivalent to 3% for the first 10 years. State income tax is not deductible on federal taxes, so the effective tax rate is 24%. 8. Orange plans on hiring 8,000 workers in Pennsylvania or Texas with a total annual expense of $80,000 per worker. The factory in North Carolina would require 5,000 workers at $90,000 per year. Wage inflation is forecasted to be 5% per year in Pennsylvania, 4% in Texas, and 3% in North Carolina over the life of the project. 9. For operational expenses, assume that fixed overhead will be 10% of annual sales and cost of goods sold (excluding labor) will be 60% of annual sales at each factory. Orange will also need to maintain a total of 10% of next year's sales in working capital. In other words, this is the cash that Orange will have to reserve for this project. It cannot be used elsewhere in the company. 10. Orange keeps a stable debt-to-equity ratio of 0.8 and will use the same mix of debt and equity to finance this project. The average interest rate on its debt is only 3%, but its required rate of return on equity is 35%. Note that interest expense is not included in operating income as the interest rate has already impacted the weighted average cost of capital (WACC). Including interest expense in the operating income will double-count the effect of interest on the project.