Sprint 1:37 PM 101 52% Shao Company is evaluating two projects with unequal life. The worksheet lists the cash flow projections and discount rate respectively for the two projects, which are assumed to be mutually exclusive. Assume that the company will not forgo potential business opportunity to reinvest, i.e., the short-life project could be reinvested. Build your own model and apply appropriate discounted cash flow analysis to determine which project should be selected. 2. 2. 12. In worksheet "Q2", conduct the following analysis. Shao Company needs to launch a new model of driverless car. It would cost $200,000,000 today to buy all necessary equipment. The driverless car project would last 4 years. Shao Company believes it could sell 5,000 units in the first year, and the units of sales will grow by 5% starting from the second year. The car could sell for $65,000/unit in each year, and the company estimates that variable costs would amount to $40,000/ unit and non-variable costs would be $30,000,000 in each year. Net working capital is needed at the beginning of a vear in an amount equal to 20% of the year's projected sales. The new model will cause a reduction of after-tax cash flows of the existing model by $28,000,000 each year. 5-Year MACRS depreciation schedule will be sexisting model by $787081,000 each year52% 5-Year MACRS depreciation schedule will be used for the equipment with depreciation rates at: 20%, 32%, 19.20%, 11.52%, 11.52%, and 5.76%. The estimated market value of the equipment at the end of year 4 is $5,000,000. The tax rate is $35% and the cost pf capital is 10%. There is no consideration on inflation. (1). Construct a model to determine the NPV of this project. Note: you may revise the sample models based on above description. Use appropriate number scales in your data entry. (2). At the bottom of your model for Part (1), build a model for the following replacement plan: Two years after the project has launched, Shao Company needs to decide whether it should replace the equipment with a more efficient model. The replacement will have no impact on the sales and net working capital requirement, but will significantly reduce the variable costs by 50% each year for the remaining three years of project life. If the replacement occurs, the equipment currently in service may be sold at $7,000,000. The new model will cost $280 million and also use a 5-year MACRS deprecation schedule. The new model may have a salvage value of $50 million three years later when the project ends and production discontinues. Estimate the incremental cash flows for the replacement plan. Using NPV rule, evaluate if the company should replace with the new efficient equipment at the end of year two. ..ll Sprint 1:37 PM 7 21 52% Q1 Q2 Q3 NPV analysis Between the two projects, which project would you select? Show your analysis below. WACC Shao project 12.30% Shoo 2 project 13.20% Project cash flows 1 3 Shool project -172 5570 55 56 SR. She project 24.59 3243 30:27 3811 4 5 7719 1670 6 41 54 46.62 Q1 Q2 Q3 Capital budgeting: Show your work here Q1 Q2 Q3 Sprint 1:37 PM 101 52% Shao Company is evaluating two projects with unequal life. The worksheet lists the cash flow projections and discount rate respectively for the two projects, which are assumed to be mutually exclusive. Assume that the company will not forgo potential business opportunity to reinvest, i.e., the short-life project could be reinvested. Build your own model and apply appropriate discounted cash flow analysis to determine which project should be selected. 2. 2. 12. In worksheet "Q2", conduct the following analysis. Shao Company needs to launch a new model of driverless car. It would cost $200,000,000 today to buy all necessary equipment. The driverless car project would last 4 years. Shao Company believes it could sell 5,000 units in the first year, and the units of sales will grow by 5% starting from the second year. The car could sell for $65,000/unit in each year, and the company estimates that variable costs would amount to $40,000/ unit and non-variable costs would be $30,000,000 in each year. Net working capital is needed at the beginning of a vear in an amount equal to 20% of the year's projected sales. The new model will cause a reduction of after-tax cash flows of the existing model by $28,000,000 each year. 5-Year MACRS depreciation schedule will be sexisting model by $787081,000 each year52% 5-Year MACRS depreciation schedule will be used for the equipment with depreciation rates at: 20%, 32%, 19.20%, 11.52%, 11.52%, and 5.76%. The estimated market value of the equipment at the end of year 4 is $5,000,000. The tax rate is $35% and the cost pf capital is 10%. There is no consideration on inflation. (1). Construct a model to determine the NPV of this project. Note: you may revise the sample models based on above description. Use appropriate number scales in your data entry. (2). At the bottom of your model for Part (1), build a model for the following replacement plan: Two years after the project has launched, Shao Company needs to decide whether it should replace the equipment with a more efficient model. The replacement will have no impact on the sales and net working capital requirement, but will significantly reduce the variable costs by 50% each year for the remaining three years of project life. If the replacement occurs, the equipment currently in service may be sold at $7,000,000. The new model will cost $280 million and also use a 5-year MACRS deprecation schedule. The new model may have a salvage value of $50 million three years later when the project ends and production discontinues. Estimate the incremental cash flows for the replacement plan. Using NPV rule, evaluate if the company should replace with the new efficient equipment at the end of year two. ..ll Sprint 1:37 PM 7 21 52% Q1 Q2 Q3 NPV analysis Between the two projects, which project would you select? Show your analysis below. WACC Shao project 12.30% Shoo 2 project 13.20% Project cash flows 1 3 Shool project -172 5570 55 56 SR. She project 24.59 3243 30:27 3811 4 5 7719 1670 6 41 54 46.62 Q1 Q2 Q3 Capital budgeting: Show your work here Q1 Q2 Q3