Quality Products, a battery manufacturer, is considering a 4-year project to launch a new model B5 (the B5 project).

If the B5 project goes ahead, it will make use of a machine (M1) currently employed in one of the existing production lines. M1 was purchased 1 year ago for $6,000,000 and has a 5-year life.

While M1 is in good working conditions, it will need to be upgraded at a cost of $550,000 before it can be used in the B5 project. The upgraded M1s salvage value, at the end of the B5 project, is expected to be $300,000.

The company has produced the following estimates for the B5 project:

The sales units per year are expected to be the same at 150,000 units. The selling price per unit (expressed in time-0 dollars) is $50.

The estimated variable cost is $34 per unit (expressed in time-0 dollars).

The estimated fixed cost is $400,000 per year (expressed in time-0 dollars).

The expected inflation rates each year in the next four years are as follows:

o Unit selling price 6% o Unit variable cost 8% o Fixed cost 5% o General inflation 6%

The production and sales of B5 will require working capital funding.

At the start of the project, the working capital funding required is expected to be 15% of the expected sales revenue in the first year of the project.

Subsequently, Quality Products will review working capital funding at the end of each year to assess if the existing level of working capital funding should be increased or reduced.

In each review, the level of working capital funding considered appropriate will always be 15% of the expected sales revenue in the next year.

David, the companys sales manager, is worried that B5 could damage the sales of another battery product called B2 currently produced by the company. B2 and B5 are similar products but B2 is less technologically advanced, and David is concerned that customers who originally intend to purchase B2 will now purchase B5 instead. He estimates that the potential loss in the sales of B2 due to this reason could reduce B2s contribution to Quality Products after-tax cash flows by $350,000 per year in the coming four years.

The after-tax real required rate of return of Quality Products is 9% per year.

The company pays profit tax one year in arrears at a rate of 30% per year. Ignore tax allowable depreciation.

Monetary amounts given above are nominal amounts unless stated or indicated otherwise.

Required:

Determine the NPV of the B5 project. Advise the company whether the project should be launched.