The Ballpark Company is evaluating the market potential of brightly colored bowling balls. The results of an initial questionnaire that Ballpark has conducted in major markets six months ago and cost $45,000 were positive. A more comprehensive market test study that will cost an additional $235,000 was just completed and affirmed at least a 20% of the total bowling ball market. Ballpark has not yet paid for this study. Now Ballpark is at the point where it is considering investing in the assets needed to produce the colored balls. The balls would be produced in a building owned by the firm. The building, which was bought by Ballpark 20 years ago for $90,000, is currently vacant but it can be sold for $224,000. The value of the building on Ballparks books is $45,000. Ballpark can depreciate this $45,000 over three years on a straight-line basis. In order to estimate the market value of the building at projects end, the company assumes that the price change will follow the trend experienced in the last 20 years (i.e. the average growth rate over the last 20 years is used as the growth rate estimate for the coming 10 years). The land on which the building sits was bought for $71,400 twenty years ago and it is valued at $190,400 today. The expected appreciation in the land value is 4.4% per year over the coming ten-year period. Ballpark assumes that it will be able to sell both the building and the land together at their expected values at the end of the projects life. The price of the new equipment needed is $1,276,800. It will require and additional $67,200 in shipping and installation costs. The useful life of the machine is 15 years but the company intends to use it for only the ten years that is the life of the project and then sell it at the termination of the project. It estimates its salvage value at $716,800. Production is estimated to be 54,600 units in the first year, rising by 16% per year for the following five years then falling by 6% per year for the remaining life of the project. The price of the balls in the first year will be $28. The bowling ball market is highly competitive and Ballpark believes that the price will increase by 2.8% per year. However, the plastic used to produce bowling balls is rapidly becoming more expensive. Variable production costs that will be $12 per unit in the first year will rise by 12% per year for the following four years then by 6.5% per year for the following five years. Total fixed costs excluding depreciation expense is assumed to stay constant at $672,000 per year for the life of the project. In addition, Ballpark is aware of the fact that some of the demand for its colored balls will be the result of shifting demand from its sales of the old one-color balls. It estimates that the new production will replace 4,480 units per year that bring in an after-tax EBIT of $13 per unit. The marginal tax rate applicable to this project is 30%. Ballpark anticipates that it will maintain an investment in working capital equal to $68,000 initially (at time point zero) and rising by 3.6% per year in the first six years then declining by 18% in each of years seven, eight, and nine before is completely retrieved in year ten. Ballpark uses the straight-line depreciation for all its depreciable assets. I) On an Excel spreadsheet, estimate the following (Aside from an initial input panel that contains all the parameters given in the question above, all Excel cells must show cell references, no cell outside the input panel should show a numerical value only, i.e. entered manually): 1. Initial net investment (NINV) (show it clearly in one box) 2. Total after-tax salvage value (ATSV) for all assets (clearly show details for each salvageable asset in another box. Place this box to the right of the NINV box) 3. The annual depreciation schedule 4. The annual incremental investment in NWC schedule 5. Annual free cash flows (FCF): Show every parameter that goes into the FCF estimates in its own row (quantity, price, variable cost per unit etc) At this point in the project, assume that the required rate of return on Ballparks project of similar risk is 15%. II) Use the capital budgeting criteria and decision rules to decide which ones acceptance of the new project and which ones dont and why. Show in as much detail as possible on an Excel spreadsheet how you will evaluate the project including all estimates of cash flows and all the necessary calculations. Assume Ballpark uses a required payback of 6 years or less. III) Ballpark is not always comfortable with the estimate of its cost of capital so it uses a sensitivity analysis to check how robust its project valuations to various estimates of cost of capital. The estimate should start with 0% and increase by increments of 5% points until it reaches 30%. For each estimate an NPV is calculated to analyze the sensitivity of NPV to various discount rate assumptions. Plot the NPV profile (NPV on y-axis and discount rates on x-axis). Watch where the NPV curve intersects with the x-axis. What do you call the intersection point?