Please insert all values

$1.$Assume $1\mathrm{.}2$ for equity beta.

$2.$ Use the depreciation schedule on p$.174($MACRS $7-$year class$).$

$3.$ Refer to the Baldwin Company case in Section $6\mathrm{.}2($pp$\mathrm{.}172-179).$

$4.$ Compute the WACC for the required rate of return.

rS $=$ rf $+\backslash$beta S $($rm $-$ rf$)$

WACC $=($S$/$V$)*$ rS $+($B$/$V$)*$ rB $(1-$ TC$)$

$5.$ Estimate the demand for new and upgrade GPWS$.$

For new GPWS$,$ estimate expected demand for year $1$ and expected growth rate and

then use them to estimate the demand for subsequent years.

$6.$ Find working capital requirements $($they increase over time with increased sales$).$

Working capital investment each year is the increase in working capital requirements.

All working capital investments are recovered at the end of Year $5.$

$7.$ Compute annual depreciation and after$-$tax salvage value.

Refer to Pr$.6-10($p$.195)$ for the computation of depreciation and salvage value.

$8.$ Find incremental cash flows $($don$$t forget to incorporate inflation$).$

Ignore sunk cost and inflate prices and costs from year $2.$

$9.$ Discount cash flows and compute the NPV$.$

MiNICASE: ALLIEDPRODUCTS

AlliedProducts, Inc., has recently won approval from the Federal Aviation Administration

$($FAA$)$ for its Enhanced Ground Proximity Warning System $($GPWS$).$ This system is

designed to give airplane pilots additional warning of approaching ground danger and thus

help prevent crashes. AlliedProducts has spent $$10$ million in research and development

the past four years developing GPWS$.$ The GPWS will be put on the market beginning this

year and AlliedProducts expects it to stay on the market for a total of five years.

As a financial analyst specializing in the aerospace industry for USC Pension &

Investment, Inc., you are asked by your managing partner, Mr$.$ Adam Smith, to evaluate the

potential of this new GPWS project.

Initially, AlliedProducts will need to acquire $$42$ million in production equipment to

make the GPWS$.$ The equipment is expected to have a seven$-$year useful life. This equip$-$

ment can be sold for $$12$ million at the end of five years. AlliedProducts intends to sell two

different versions of the GPWS:

New GPWS$-$intended for installation in new aircraft. The selling price is

$$70,000$ per system and the variable cost of production is $$50,000$ per system.

$($Assume cash flows occur at year$-$end.$)$

Upgrade GPWS $-$ intended for installation on existing aircraft with an older

version ground proximity radar in place. The selling price of the Upgrade system

is $$35,000$ per system and the variable cost to produce it is $$22,000$ per system.

AlliedProducts intends to raise prices at the same rate as inflation. Variable costs will

also increase with inflation. In addition, the GPWS project will also incur $$3$ million in

marketing and general administration costs the first year $($expected to increase at the same

rate as inflation$).$

AlliedProducts' corporate tax rate is $40$ percent. Assume that the equity beta listed in

Value Line Investment Survey $($the latest edition$)$ is the best estimate of AlliedProducts'

beta. A five$-$year U$.$S$.$ Treasury Bond has a rate of $6\mathrm{.}20$ percent and the S&P $500$ recent

years' historical average excess return $($i$.$e$.,$ the market return less the Treasury bond rate$)$

is $8\mathrm{.}3$ percent. Annual inflation is expected to remain constant at $3$ percent. Further, sup$-$

pose AlliedProducts' cost of debt is $6\mathrm{.}2$ percent and $($although somewhat unrealistic$)$ its

debt$-$to$-$equity ratio is $50$ percent and will remain at $50$ percent for at least five years.

Commercial Aircraft Market

The state of the economy has a major impact on the airplane manufacturing industry.

Airline industry analysts have the following production expectations, depending on the

annual state of the economy for the next five years:

Table $12\mathrm{.}4$

While probabilities of each state of the economy will not change during the next five

years, airplane production for each category will increase, as shown in Table $12\mathrm{.}4,$ each

year after year $1.$ The FAA requires that these planes have new ground proximity warning

systems, of which there are a number of manufacturers besides AlliedProducts.

AlliedProducts estimates that there are approximately $12,500$ existing aircraft that

comprise the market for its GPWS Upgrade package. Due to FAA regulations, all existing

aircraft will be required to get an upgraded ground proximity warning system within the

next five years, again, not necessarily from AlliedProducts. AlliedProducts believes the

upgrades of the existing aircraft fleet will be spread evenly over the five years $($the time

value of money would suggest manufacturers defer purchasing upgrades until the fifth

year; however, consumer demand for the additional safety will induce earlier upgrades$).$

AlliedProducts uses the MACRS depreciation schedule $($seven$-$year property ciass$).$

The immediate initial working capital requirement is