Stewart is considering two alternatives proposed by the company$$s engineer. The first is the acquisition and installation of used equipment that will provide the capacity to blend an additional $800,000$ gallons annually. The used equipment will cost $$105,000$ to acquire and $$15,000$ to install. The equipment is projected to have an estimated life of three years. The second option is the acquisition and installation of new equipment with the capacity to blend $1,600,000$ gallons annually. The new equipment would have a substantially higher cost of $$360,000$ to acquire and $$60,000$ to install, but have a higher capacity and an economic life of seven years. The new equipment is also more efficient thus the cost of blending is less than the blending cost of the used equipment. Stewart asked Clarkson to lead the evaluation process. Stewart thinks the used equipment could be obtained without a new bank loan. The acquisition of the new equipment would require new bank borrowing.

The evaluation of each alternative will require an estimate of the financial benefits associated with each. The marketing and sales staff estimated incremental sales of blended package material will be $600,000$ gallons the first year and increase by $15\%$ each year thereafter. During the last year, the average selling price for blended material has been near $$4\mathrm{.}05$ per gallon and material cost $($not including a cost for blending the material$)$ has been approximately $$3\mathrm{.}53.$ The marketing staff anticipates no significant change in either future selling prices or product costs; however they do estimate variable selling and administrative expenses associated with the increased blended material sales to be $$\mathrm{.}20$ per gallon.

The used equipment will cost $$105,000$ with another $$15,000$ required to install the equipment. The equipment is projected to have an economic life of three years with a salvage value of $$9,000.$ The equipment will provide the capacity to blend an additional $800,000$ gallons annually. The variable cost to blending cost is estimated to be $$\mathrm{.}20$ per gallon. The equipment will be depreciated under the Modified Accelerate Cost Recovery System $($MACRS$)3-$year class. Under the current tax law, the depreciation allowances are $0\mathrm{.}33,0\mathrm{.}45,0\mathrm{.}15,$ and $0\mathrm{.}07$ in years $1$ through $4,$ respectively. The increased sales volume will require an additional investment in working capital of $2\%$ of sales $($to be on hand at the beginning of the year$).$

The acquisition of new equipment with the capacity to blend $1,600,000$ gallons annually is the second alternative. The new equipment would cost $$360,000$ to acquire with an installation cost of $$60,000$ and have an economic life of seven years and a salvage value of $$60,000.$ The new equipment can be operated more efficiently than the used equipment. The cost to blend a gallon of material is estimated to be $$\mathrm{.}17.$ The equipment will be depreciated under the MACRS $7-$year class. Under the current tax law, the depreciation allowances are $0\mathrm{.}14,0\mathrm{.}25,0\mathrm{.}17,0\mathrm{.}13,0\mathrm{.}09,0\mathrm{.}09,0\mathrm{.}09$ and $0\mathrm{.}04$ in years $1$ through $8,$ respectively. The increased sales volume will require an additional investment in working capital of $2\%$ of sales $($to be on hand at the beginning of the year$)$

Stewart is concerned that the projected annual sales growth rate of $15\%$ for incremental blended material may be optimistic. Recalculate the Cash Payback Period, Discounted Cash Payback Period, NPV$,$ IRR and MIRR for each alternative assuming the annual sales growth rates of $10\%$ and $5\%.$ Assume a WACC of $15\%.$ Does the change in growth rate alter the recommendation made in question $5?$ Solution requires preparation of spreadsheets. Explain