Project I: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $250,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $100,000. The project will last 6 years at which time the market value for the equipment will be $30,000. The project will project a product with a sales price of $120.00 per unit and the variable cost per unit will be $65.00. The fixed costs would be $500,000 per year. Because this project is very different to current products sold by the business, management has imposed a 2 percentage point premium above its current WACC as the valuation hurdle it must meet or surpass. Years 2014 2015 2016 2017 2018 2019 Forecasted Units Sold 20,000 50,000 40,000 30,000 20,000 10,000 Years 2014 2015 2016 2017 2018 2019 Forecasted Units Sold 19,000 45,000 38,000 32,000 18,000 12,000 Years 2014 2015 2016 2017 2018 2019 Forecasted Units Sold 21,000 55,000 44,000 28,000 25,000 11,000

WACC is 11.49%

Depreciation Schedule Modified Accelerated Cost Recovery System (MACRS) Ownership Year 1 2 3 4 5 6

5-Year Investment Class Depreciation Schedule 20% 32% 19% 12% 11% 6% Total = 100%

A. What is the Net present Value of discounted cash flow?

B. Internal Rate or Return?

C. Payback period?

D. Profitability Index?

E. Should the project be accepted or rejected based on Net present value?

F. Long-term debt before and after tax

G. Preferred Stock?

H. Average Cost of retained earnings?