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Masters Company currently produces cereal targeted to consumers over 40 years age. Sales have steadily declined over the last 10 years resulting in a decision to shut down the manufacturing plant. The plant was built 40 years ago at a cost of $28,000,000 and is now fully depreciated. A rival cereal company has offered to purchase the existing facility for $ 12,000,000 in as is condition.

The Vice President in charge of the plant has developed an alternative to closing the plant. He has proposed using the existing plant to manufacture wheat flakes targeted to consumers under 10 years of age. The VP estimates sales of wheat flakes to be 400,000 cases in Year 1 (2021) and to increase by 5% every year till year 5 (2025). The sales price of wheat flakes will be $120 per case in year 1 (2021) and will increase 5% annually thereafter.

Around 1,200 case of wheat flakes can be produced from one ton of wheat. In year 1 (2021), the price of wheat per ton is expected to be $25,000. The price of wheat is expected to increase by 4% annually. For each ton of wheat, 0.75 ton of sugar will be added. In year 1, the price of sugar is expected to be around $90,000 per ton and it is expected to increase at 4% annually.

The plant will employ 75 workers and their cost will be 0.8 million in year 1 and it will increase by 4% annually thereafter. The plants production manager has determined the costs of retooling required to begin production. New flake stamping equipment will cost $25,000,000. The new equipment and storage facilities will be depreciated over 10 years using MACRS rates. The estimated market value of the equipment at the end of the projects 5-year life is $3000,000.

The project would require an initial net working capital of $3 million and it will be 8% of annual sales thereafter. Masters company has a marginal tax rate of 34%. The firms existing capital structure is optimal. The cost of capital for average risk projects is estimated at 12%. It is 17% for high-risk projects and 7% for low-risk projects.

Q: You are unsure about the risk of the project. Assume that the true WACC lies between 10% and 15%. Now, construct two-way data tables to assess the sensitivity of NPV to changes in the equipment costs, changes in the selling price, changes in the selling quantity and changes in the variable costs?