PROPOSAL The production foreman for ABC Corporation has proposed the following two projects for minimizing costs and generating higher revenue: Project 1: Retool current production equipment. The following price quote has been identified: In addition, the following incremental cash flows have been identified: - Increased revenue for the first year is expected to be $98,000. Revenue will increase at approximately 5% per year for the following four years. - Reduced operating costs for the first year are expected to be $40,000. Cost savings will diminish by 22% a year for the project's remaining four years. - The retooled equipment will require $32,000 in additional maintenance costs for the first year. These additional costs will increase by 16% a year for the remaining four years. - The retooled equipment will require an additional $9,000 in working capital. Working capital will be recaptured at the end of the investment horizon. - The expected salvage value of the retooled equipment at the end of the five-year investment horizon is $22,000. Project 2: Expand current production capabilities by purchasing additional equipment. The following price quote has been identified: In addition, the following incremental cash flows have been identified: - Increased revenue for the first year is expected to be $125,000. Revenue will increase at approximately 10% per year for the following four years. - Reduced operating costs for the first year are expected to be $75,000. Cost savings will diminish by 11% a year for the project's remaining four years. - The new equipment will require $35,000 in specialized maintenance costs for the first year. These specialized costs will increase by 9% a year for the remaining four years. - The new cquipment will requirc an additional $20,000 in working capital. Working capital will be recaptured at the end of the investment horizon. - The expected salvage value of the equipment at the end of the five-year investment horizon is $19,000. Additional information: - The new equipment and the retooling costs are considered 5-ycar property for depreciation purposes. ABC Corporation utilizes the appropriate MACRS depreciation method for allocating capital costs. The applicable depreciation rates are shown below. a. Year 1:20\% b. Year 2: 32\% c. Year 3:19\% d. Year 4: 12\% e. Year 5: 11\% f. Year 6: 6\% - The marginal corporate tax rate for ABC Corporation is 25%. REQUIRED: 1. Prepare an incremental cash flow analysis worksheet for each project. 2. Compute the net present value (NPV) for each project using a cost of capital range, where the range equals 8% through 32% (use increments of 2 percentage points). 3. Compute the internal rate of return (IRR) for each project. 4. Prepare an annotated net present value profile that clearly identifies the following: a. The NPVs for each project. b. 'The IRRs for each project (within 3 decimal places after conversion to percentage format). c. The precise (i.e., within 3 decimal places) crossover rate. 5. Prepare a memorandum using robust sentences and paragraphs, and avoid the use of bullet points. Ensure that the memorandum addresses the following points of analysis: a. Differenees between independent and mutually exclusive projects i. Assume that the projects are independent. Determine which project(s) should be selected for cost of capital ( ks. ) figures cqual to 10%,18%, and 24%. Thoroughly cxplain the reasons behind the selections, and determine if the crossover rate and internal rates of return are relevant to the selections. ii. Assume that the projects are mutually exclusive. Determine which project(s) should be selected for cost of capital (kn) figures equal to 10%,18%, and 24%. Thoroughly explain the reasons behind the selections, and determine if the crossover rate and internal rates of return are relevant to the selections. b. Perform a sensitivity analysis of revenue i. For projects 1 and 2, increase projected revenue in year one by 8% and assume that everything else remains the same. For a cost of capital ( kis) of 12%, determine the new NPV for both projects and the percentage changes the NPVs experienced relative to the base cases. Briefly discuss the implications. ii. For projects 1 and 2, decrease projected revenue in year one by 8% and assume that everything else remains the same. For a cost of capital (k5) of 12%, determine the new NPV for both projects and the percentage changes the NPVs experienced relative to the base cases. Briefly discuss the implications. iii. Present your findings in a table showing the NPVs and the percentage changes relative to the base case. c. Perform a sensitivity analysis of the salvage value i. For projects 1 and 2 , increase the projected salvage value in year 5 by 8% and assume that everything else remains the same. For a cost of capital (ksi) of 12%, determine the new NPV for both projects and the percentage changes the NPVs experienced relative to the base cases. Briefly discuss the implications. ii. For projects 1 and 2, decrease the projected salvage value in year 5 by 8% and assume that everything else remains the same. For a cost of capital (k5) of 12%, determine the new NPV for both projects and the percentage changes the NPVs experienced relative to the base cases. Briefly discuss the implications. iii. Present your findings in a table showing the NPVs and the percentage changes relative to the base case. d. In light of the analysis performed on these projects, select the better project and make a specific recommendation. Thoroughly explain why the project chosen is a more appropriate choice than the other project. Support the selection made with the relevant results of your calculations and analysis. PROPOSAL The production foreman for ABC Corporation has proposed the following two projects for minimizing costs and generating higher revenue: Project 1: Retool current production equipment. The following price quote has been identified: In addition, the following incremental cash flows have been identified: - Increased revenue for the first year is expected to be $98,000. Revenue will increase at approximately 5% per year for the following four years. - Reduced operating costs for the first year are expected to be $40,000. Cost savings will diminish by 22% a year for the project's remaining four years. - The retooled equipment will require $32,000 in additional maintenance costs for the first year. These additional costs will increase by 16% a year for the remaining four years. - The retooled equipment will require an additional $9,000 in working capital. Working capital will be recaptured at the end of the investment horizon. - The expected salvage value of the retooled equipment at the end of the five-year investment horizon is $22,000. Project 2: Expand current production capabilities by purchasing additional equipment. The following price quote has been identified: In addition, the following incremental cash flows have been identified: - Increased revenue for the first year is expected to be $125,000. Revenue will increase at approximately 10% per year for the following four years. - Reduced operating costs for the first year are expected to be $75,000. Cost savings will diminish by 11% a year for the project's remaining four years. - The new equipment will require $35,000 in specialized maintenance costs for the first year. These specialized costs will increase by 9% a year for the remaining four years. - The new cquipment will requirc an additional $20,000 in working capital. Working capital will be recaptured at the end of the investment horizon. - The expected salvage value of the equipment at the end of the five-year investment horizon is $19,000. Additional information: - The new equipment and the retooling costs are considered 5-ycar property for depreciation purposes. ABC Corporation utilizes the appropriate MACRS depreciation method for allocating capital costs. The applicable depreciation rates are shown below. a. Year 1:20\% b. Year 2: 32\% c. Year 3:19\% d. Year 4: 12\% e. Year 5: 11\% f. Year 6: 6\% - The marginal corporate tax rate for ABC Corporation is 25%. REQUIRED: 1. Prepare an incremental cash flow analysis worksheet for each project. 2. Compute the net present value (NPV) for each project using a cost of capital range, where the range equals 8% through 32% (use increments of 2 percentage points). 3. Compute the internal rate of return (IRR) for each project. 4. Prepare an annotated net present value profile that clearly identifies the following: a. The NPVs for each project. b. 'The IRRs for each project (within 3 decimal places after conversion to percentage format). c. The precise (i.e., within 3 decimal places) crossover rate. 5. Prepare a memorandum using robust sentences and paragraphs, and avoid the use of bullet points. Ensure that the memorandum addresses the following points of analysis: a. Differenees between independent and mutually exclusive projects i. Assume that the projects are independent. Determine which project(s) should be selected for cost of capital ( ks. ) figures cqual to 10%,18%, and 24%. Thoroughly cxplain the reasons behind the selections, and determine if the crossover rate and internal rates of return are relevant to the selections. ii. Assume that the projects are mutually exclusive. Determine which project(s) should be selected for cost of capital (kn) figures equal to 10%,18%, and 24%. Thoroughly explain the reasons behind the selections, and determine if the crossover rate and internal rates of return are relevant to the selections. b. Perform a sensitivity analysis of revenue i. For projects 1 and 2, increase projected revenue in year one by 8% and assume that everything else remains the same. For a cost of capital ( kis) of 12%, determine the new NPV for both projects and the percentage changes the NPVs experienced relative to the base cases. Briefly discuss the implications. ii. For projects 1 and 2, decrease projected revenue in year one by 8% and assume that everything else remains the same. For a cost of capital (k5) of 12%, determine the new NPV for both projects and the percentage changes the NPVs experienced relative to the base cases. Briefly discuss the implications. iii. Present your findings in a table showing the NPVs and the percentage changes relative to the base case. c. Perform a sensitivity analysis of the salvage value i. For projects 1 and 2 , increase the projected salvage value in year 5 by 8% and assume that everything else remains the same. For a cost of capital (ksi) of 12%, determine the new NPV for both projects and the percentage changes the NPVs experienced relative to the base cases. Briefly discuss the implications. ii. For projects 1 and 2, decrease the projected salvage value in year 5 by 8% and assume that everything else remains the same. For a cost of capital (k5) of 12%, determine the new NPV for both projects and the percentage changes the NPVs experienced relative to the base cases. Briefly discuss the implications. iii. Present your findings in a table showing the NPVs and the percentage changes relative to the base case. d. In light of the analysis performed on these projects, select the better project and make a specific recommendation. Thoroughly explain why the project chosen is a more appropriate choice than the other project. Support the selection made with the relevant results of your calculations and analysis