Project Data:

Mason Manufacturing, Inc. (hereinafter referred to as the company), has had a surge in orders that they believe will continue into the foreseeable future, and if so will likely necessitate buying a new processing system. They have decided to do an analysis on potentially buying a new system. They have hired you to complete this analysis and make a recommendation.

To perform the necessary analysis, the following data has been compiled:

The project has a 5 year timeline.

The company purchased a production robot 5 years ago, and the products that the robot originally manufactured have since been discontinued. They have determined that this robot can be used in conjunction with the new system. The company bought the robot 5 years ago for $1,000.

The new system will cost $6,400. This will be depreciated straight-line to 0 over the systems estimated 8-year useful life. (Hint: the depreciation amount will be the same for each year of the project).

The company has performed Research and Development over the past year on the products that the new system would build in the amount of $2,000.

If the company decides to buy the new system, they will sell their existing system, which has been fully depreciated. A competitor has made an offer to purchase the old system for $253.16. This transaction would take place immediately at the beginning of the project (Year 0).

Another competitor has told the company that they will buy the new system for $1,900 at the end of the project (the end of Year 5).

Products produced by the new system will add an estimated $9,750 to the companys revenue in Year 1.

Sales growth in Years 2 & 3 is expected to be 5% per year.

As the market begins to become saturated, sales are expected to decline in Years 4 & 5 by 4% per year.

Total Costs (Expenses) are estimated to be 85.5% of sales.

Additional Net Working Capital will be required in Year 0 in the amount of $110, 70% of which will be recovered in the projects terminal year.

The companys tax rate is 21%.

The required rate of return on the project is 10%.

Part 1 Base Case:

Using the above data, complete the DCF Model in Excel posted on Connect. Compute the Base Cases NPV and IRR in the cells indicated.

A consulting firm has suggested a few alternate scenarios based on their analysis, and has computed their estimate of the likelihood of each scenario occurring. Use this data to make your final recommendation to the company.

The consulting firm has estimated that the Base Case has a 55% chance of occurring.

Alternate Scenario 1: Pessimistic Case

The consulting firm found that a very small change to a few of the key variables led to a large change in NPV. Under this scenario, the projects NPV dropped to -$98.60. The consulting firm has estimated that this scenario has a 20% chance of occurring.

Alternate Scenario 2: Best Case

Under this scenario, changes were made to key variables using the most optimistic projections. The cases NPV rose to $108.43. The consulting firm has estimated that this scenario has a 10% chance of occurring.

Alternate Scenario 3: Worst Case

For this scenario, the most pessimistic estimates were used, resulting in an NPV of -$287.45. The consulting firm has estimated that this scenario has a 15% chance of occurring.

Conclusion:

You need to provide the company with an Accept or Reject recommendation, which you need to enter in a cell anywhere on the Conclusion tab. You dont need to provide an explanation for your recommendation.