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%

ACCEPT OR REJECT THE PROJECT AND WHY?

B C D 7 8 9 A B ACCEPT OR REJECT THE PROJECT AND WHY? (Your answer here) 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 P21 X f B D E F G H 1 J K L 28 29 30 31 Year 0 1 2 3 4 5 6 7 8 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 A B D E F G H CREATE DATA TABLE BELOW Tax rate 56 57 58 59 60 61 62 63 64 65 66 Required rate of return B C D 7 8 9 A B ACCEPT OR REJECT THE PROJECT AND WHY? (Your answer here) 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 P21 X f B D E F G H 1 J K L 28 29 30 31 Year 0 1 2 3 4 5 6 7 8 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 A B D E F G H CREATE DATA TABLE BELOW Tax rate 56 57 58 59 60 61 62 63 64 65 66 Required rate of return