Question 3 Diamond Sparkle is projecting sales units for new sprinkler pipes. The forecast sales units, fixed costs and variable costs per unit are provided in the table below. It is anticipated that the production of new sprinkler pipes needs $1.5 million in net working capital and then additional net working capital in investments for the next five years equal to 15% of the projected sales increase for the following year. To begin production, the firm needs to use equipment that has installation costs of $25.5 million. The equipment has a resale value of 20% of its initial investment costs. Since the equipment falls under the MACRS property, the MACRS seven-year recovery percentage applied (Refer Table 1). Forecasted sales Year 1 2 3 Sales unit 80,000 95,000 138,000 15,000 88,000 4 5 Additional information Fixed costs per year Variable costs per unit Sales price per unit Tax rate $2,350,000 $198 $338 35% 15-Year 20-Year TABLE 1 MACRS Half-Year Convention Depreciation Rate for Recovery Period Year 3-Year 5-Year 7-Year 10-Year 1 33.33% 20.00% 14.29% 10.00% 2 44,45 32.00 24,49 18.00 3 14.81 19.20 17,49 14.40 4 7.41 11.52 12.49 11.52 5 11.52 8.93 9.22 6 5.76 8.92 7.37 7 8.93 6.55 8 4.46 6.55 9 6.56 10 6.55 11 3.28 12 13 14 15 16 17 18 19 20 21 5.00% 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 2.95 3.750% 7.219 6.677 6.177 5.713 5.285 4.888 4.522 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 2.231 Required: a) Prepare projections of cash flow and calculate the net present value for Diamond Sparkle (assume discount rate of 12%). Should the company accept this project? Give your reason. b) Explain FOUR (4) reasons why the net present value investment appraisal method is preferred to other investment appraisal methods