QX Corp. is a manufacturer of automotive brake pads for original equipment manufacturers (OEMs). TESLA has approached them to manufacture brake pads for the Model 3. TESLA is currently not a customer and their brake pad is unique and requires a specialized machine. The contract will be for 8 years and will require the purchase of the specialized machine that will be needed to manufacture the brake pad as well as hiring additional employees. You are a financial analyst in the Financial Planning & Analysis Department. The production department supplied you with the following:

--Cost of the machine: $54,500,000

--QX will sell the following number of brake pads per year.

Year 1 - 100,000 , Year 2 - 110,000, Year 3 - 120,000, Year 4 - 125,000, Year 5 - 110,000, Year 6 - 100,000, Year 7 - 100,000, Year 8 - 90,000

-- Sales price per pad is $200.00

-- The material cost per brake pad to manufacture is expected to be $30 per pad for all eight years

-- The labor cost per brake pad is expected to be $20 per pad for all eight years

-- Operating expenses (not including depreciation) will be 10.0% of COGS

-- The equipment will be depreciated based on the following MCARS tax rates which are:

Year 1 - 20.0%, Year 2 - 32.0%, Year 3 - 19.2%, Year 4 - 11.52%, Year 5 - 11.52% and Year 6 - 5.76%

-- The equipment will be sold for $1,000,000 at the end of year 8.

-- Tax Rate is 25%

-- Management requires a rate of return on this project of 14%

REQUIRED

You are to prepare an IRR and NPV analysis and recommend whether to ACCEPT or REJECT the project and WHY. Also prepare a DATA TABLE assuming the following sensitivities for NPV calculation.

Tax rate - 20%, 22%, 24%, 25%, 27%, 29%

Required rate of return - 10%, 12%, 14%, 15%, 17%, 19%

B C 7 A ACCEPT OR REJECT THE PROJECT AND WHY? (Your answer here) 00 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cost of machine 23 Tax Rate 24 Required Rate of Return 25 Material Cost per Brake Pad 26 Labor Cost per Brake Pad 27 28 29 A B D E F G H 1 J K M 29 Year 0 1 2 3 4 5 6 7 8 30 31 32 33 # of Brake Pads Sold 34 Sale Price per Brake Pad 35 Sales 36 Material Cost per Brake Pad 37 Labor Cost per Brake Pad 38 COGS - Material and Labor 39 COGS as a % of Revenue 40 Operating Expenses 41 Operating Expenses as a % of COGS 42 Depreciation Expense 43 Depreciation MACRS % 44 EBIT 45 Taxes 46 Net Income 47 Add: Depreciation 48 Deduct: Change in net working capital 49 Deduct: Capital Expenditure 50 Cash Flow 51 52 53 Net Present Value 54 55 Internal Rate of Return 56 CREATE DATA TABLE BELOW Tax rate Required rate of return