RICs marketing vice president believes that annual sales would be 20,000 units if the units were priced at $3,000 each, so annual sales are estimated at $60 million. RIC expects no growth in unit sales, and it believes that the unit price will rise by 2% each year. The engineering department has reported that the project will require additional manufacturing space, and RIC currently has an option to purchase an existing building, at a cost of $12 million, which would meet this need. The building would be bought and paid for on December 31, 2015, and for depreciation purposes it would fall into the MACRS 39-year class.

The necessary equipment would be purchased and installed in late 2015, and it would also be paid for on December 31, 2015. The equipment would fall into the MACRS 5-year class, and it would cost $8 million, including transportation and installation.

The projects estimated economic life is four years. At the end of that time, the building is expected to have a market value of $7.5 million and a book value of $10.91 million, whereas the equipment would ha a market value of $2 million, and a book value of $1.36 million.

The production department has estimated that variable manufacturing costs would be $2,100 per unit, and that fixed overhead costs, excluding depreciation, would be $8 million a year. They expect variable costs to rise by 2 percent per year, and fixed costs to rise by 1 percent per year. Depreciation expenses would be determined in accordance with MACRS rates.

RICs marginal federal-plus-state tax rate is 40 percent; its cost of capital is 25 percent; and for capital budgeting purposes, the companys policy is to assume that operating cash flows occur at the end of each year. Because the plant would begin operations on January 1, 2016, the first operating cash flows would occur on December 31, 2016.

Several other points should be noted: (1) RIC is a relatively large corporation, with sales of more than $4 billion, and it takes on many investments each year. Thus, if the computer control project does not work out, it will not bankrupt the company management can afford to take a chance on computer control project. (2) If the project is accepted the company will be contractually obligated to operate it for its full four-year life. Management must make this commitment to it component suppliers. (3) Returns on this project would be positively correlated with returns on RICs other projects and also with the stock market the project should do well if other parts of the firm and the general economy are strong.

Assume you have been assigned to conduct the capital budgeting analysis. For now, assume that the project has the same risk as an average project, and use the corporate weighted average cost of capital of 25 percent.

1. Using the incremental cash flows (the cash flows were computed and are shown in the attached image below of the spreadsheet), compute the following and state in each case whether the company should go ahead with the project.
   1. Payback
   2. NPV
   3. IRR
   4. Profitability Index
   5. 

Verizon LTE 2:17 PM @ 67% 0 AA As3.us-east-1.amazonaws.com C CASH FLOW ESTIVATION WORKSHEET FOR REGENCY INTEGRATED CHIPS Input Data (in thousands of dollars) S12.000 $7,500 $2.000 S8000 Building Cost Equipment Cast Net Operating Working Capital Sales First Year Sales (in units) Growth rate in units sold 20.000 Market value of building in 2017 Market value of equipment in 2017 Tax Rate WACC Inflation growth in slaes price Inflation growih in variable cost per unit Inflation growth in fixed costs 75% 0.00% 2.00% Sales price per unit $3.00 Variable cost per unit $2.10 1.00% Fixed cost S8,000.00 Depreciation Schedule Cumulative Depr'n Building Depreciation Rate Building Depreciation Ending Book Value: Cost - Accumulated Depreciation 2 T3 T4 2.6% 2,6% 2.6% $312.0 $112.0 $312.0 S11,532.0 $11,220,0 $10,908.0 $1.092.00 $156,0 $11.844.0 Equipment Depreciation Rate Equipment Depreciation Ending Book Value: Cost - Accumulated Depreciation 20.0% $1,600.0 S6,400.0 32.0% $2.560.0 $3.840.0 19.0% S1,520,0 52.120.0 12.0% $960,0 $1,360.0 $6.640,00 Net Salva Values in 2011 Total Estimated Market Value in 2017 Book Value in 2017 Expected Gain or Loss Taxes Paid or Tax Credit Net Cash From Salvage Ruilding $7.500 S10.908.0 153. 40 IS1.363.20) 58.863 Equipment $2.000 $1,300.0 S640,0 $256.00 Projected Net Cash Flows Estimation Statement 2013 2014 2015 2016 2017 Building Equipment $12.000 58.000 Operating Cash Flows Over the Project's Life Units sold 20,000 20,000 20.000 20.000 Sales price $3,00 $1.06 $3.12 3.18 Sales revenue 600,000 61,200 62.424 63.672.48 Variable costs 42,000 42.840 43,696.8 44,570.736 8,000 XONO 8,160 8 8,242 408 156 312 312 1.600 2.5601 1.5201 960 7,408 8,734 4 9,587.336 Fixed operating costs Depreciation (building) Depreciation equipment) Operating income before taxes (EBIT) Taxes on operating income (40%) Net operating profit after taxes (NOPAT) Add back depreciation Operating cash flow 8,244 3.297.6 2.963.21 4.444.8 3,49376 5.240.64 3,834.934 5.752.402 4.946.4 1,736 1.272 6,702.4 7316,8 7,072.64 7,024.402 Cash Flows Due to Net Operating Working Capital $6.000 Net Operating Working Capital (based on sales) Cash flows due to investment in NOWC 56,120 (S120) $6.242 (S122) $6,367 (S125) (56,000) $6,367 Salvage Cash Flows: Long-Term Assets Net salvage cash flow: Building $8.863 $1,744 Net salvage cash flow: Equipment Total salvage cash flows $10,607 Net Cash Flow (Time line of cash flows) (526,000 $6,582 55,194 56,948 $23,999