Pinto Limited has recently been subject to significant competition from overseas manufacturers withmuch lower costs. To combat this, Pinto is considering a project that will see it move into a newproduct market considered riskier than its current operations. The CEO has asked you to undertake afinancial analysis of the proposed project and present your recommendations in a short memo. Aspart of your financial analysis, you will calculate NPV, IRR, payback period, discounted payback periodand profitability index.

The project requires an upfront investment in plant and equipment of $15 million, which will bedepreciated on a straight-line basis over the five-year life of the project. The equipment is notexpected to have any significant salvage value at the end of its depreciable life.Pinto paid $25,000 in fees to consultants for a market analysis related to the project. This analysispredicted sales volume of 200,000 units in the first year, which would grow by 50% per year in yearstwo and three, and fall by 50% in each remaining year as demand wanes. Selling price in the firstyear is expected to be $75 and grow by 3% each year after that.

Pintos operations manager has estimated cost of goods sold for the project will equal 60% of sales revenues and selling, general and administrative expenses directly related to the project (excludingdepreciation) will be $1 million in the first year and increase by 5% per year thereafter. The operations manager has not included in his estimates any cost for a project operations base becausethe plan is to use a building the company already owns. Currently Pinto rents this building to anothercompany for $250,000 per year.

The project will require an upfront investment in net working capital equal to 20% of the year 1 sales revenue forecast. This investment in working capital will be fully recovered at the end year 5.The company has a 10% weighted average cost of capital and is subject to a 30% tax rate.

Required : Prepare (1) a spreadsheet financial analysis of the proposed project and (2) a memo toPintos CEO that briefly explains and justifies your chosen methods and any assumptions made,summarises your findings, and presents your recommendations on the proposed project.