Polycorp Steel Division is considering a proposal to purchase a new machine to produce a new product for a

ten$-$year contract. The new machine will cost $$12$ million. The firm intends to use $$4,000,000$ in debt and

the rest in equity to finance the project. The debt will be repaid over eight years in equal annual, end of year

repayments. The interest rate on the debt is $5\%$pa$.$ The machine has an estimated life of $10$ years for

accounting and taxation purposes. Installation will cost a further $$500,000.$ Installation costs are capitalised

and added to the cost of the machinery for depreciation and investment allowance calculations. The contract

will not continue beyond eight years and the equipment has an estimated salvage value at the end of eight

years of $$600,000.$ The tax rate is $30$ percent and taxes are payable at the end of the year in which profit is

earned. An investment allowance of twenty percent on the outlay plus installation costs is available from the

government $($only available in the first year$).$ The after$-$tax cost of capital is $9\mathrm{.}75\%$pa$.$ Addition current

assets of $$400,000$ are required immediately to support the project. Assume that this amount is recovered in

full at the end of the life of the project. The new product will be charged $$400,000$ of allocated head office

administration costs each year even though head office will not actually incur any extra costs or cash flows

to manage the project. This is in accordance with Head Office$$s policy of allocating all corporate overhead

to divisions. The Division will incur extra marketing and administration cash outflows of $$650,000$ per year

for the project. An amount of $$200,000$ has been spent on a pilot study and market research for the new

product. This account has not been paid but will have to be paid whether the project is accepted or not. The

projections provided here are based on this work. Projected sales in the first year for the new product are

$80,000$ units at $$130$ per unit per year. Unit sales are expected to increase by $10\%$pa for each of the next two

years and then by $2\%$pa for the remaining years. Cash operating expenses are estimated to be $77\%$ of sales

$($excludes marketing and administration, and head office items$).$ Except for initial outlays, assume cash

flows occur at the end of each year $($unless otherwise stated$).$ Assume diminishing value depreciation

$($reducing balance$)$ for tax purposes. Ignore inflation.

Required

You are working as a financial analyst for Polycorp Steel. Management has asked you to perform the

following tasks:

$($a$)$ Conduct a Project Evaluation in Excel. Calculate the NCFAT,NPV$,$ IRR of the Project. Is the project acceptable?