Quiz 2 - FINC 850 15F Name ________________

I, ________________, truthfully declare that this assignment was completed by me alone, to the best of my ability, and is honest and original.

Quiz is due by midnight Thursday, November 19. Please complete the assignment in Excel and submit an electronic Excel file via the UD Dropbox system. Put your last name in the file name (Smith-quiz2) and in the file as well. This is an individual assignment. The quiz is open-book and should be completed by you and you alone. Once you have this in your hand, you are prohibited from either giving or taking any information related to this quiz from others. Additionally, you acknowledge the implicit signing of the honor pledge above when submitting the quiz electronically.

The Air Marshal Co. has recently completed a $9,000,000 two-year marketing study. Based on the results of this study, Air Marshal has estimated that 1000 units of its new security electro-optical human scanning hardware, known as "Marshal Dillon," could be sold annually over the next 14 years, at a price of $150,000 the first year with an estimated 2% annual rise from inflation in years 2-7. The sales price is expected to drop to $125,000 in year 8 due to increasing competition with 2% annual increase for year 9-14. Variable costs per unit are $50,000 with an estimated 3% annual rise from inflation in years 2-14 and incremental cash fixed costs total $10 million per year all 14 years.

Start-up costs include $170 million to build production facilities and an additional $10,000,000 for shipping costs, $20 million for land, and net operating working capital is projected to be 12% of next year sakes. The production facility will be depreciated on a straight-line basis to a value of zero over the fourteen-year life of the project. At the end of the project's life, the facilities (including the land) will be sold for an estimated $40 million. The value of the land is not expected to change during this time period.

Finally, start up would also entail one-time immediate tax-deductible cash expenses of $6 million at year zero. Air Marshal is an ongoing, profitable business and pays taxes at a 35% rate. Air Marshal has a 12% opportunity cost of capital for projects such as this one.

Be sure to answer to the following questions and express your numbers in millions of dollars where appropriate. If your annual income should be a loss, assume that tax could be saved from other profitable parts of the company.

Please estimate the cash flows for all 14 years and provide a detailed statement of projected cash flows, as was done in the sample quiz solution.

Calculate the following for the project: NPV, IRR, and MIRR.

Should Air Marshal proceed with the Marshal Dillon project?