The CFO of Montag Metals is considering the purchase of a new stamping machine to support its sales growth. The firm has hired you to determine whether it will be a good idea to pursue this project. The new machine will allow the firm to increase annual revenues by $3,500,000. Annual cash costs will increase by $2,000,000. In addition, the firm will need to immediately increase inventory by $500,000. Accounts payable will partly offset this, increasing by $350,000. The new stamping machine costs $4,500,000 installed. It will be depreciated by MACRS method for 3-year property. The expected economic life of the machine is five years. At the end of five years the machine will likely be sold for about 20% of its initial cost. The firm's tax rate is 21%. The CFO also asks you to prepare a report recommending whether the firm should go forward with the investment or not. In preparing your recommendation, you should create a spreadsheet (use template provided; no other template is accepted) to carefully detail the following calculations: a) b) d) The initial investment in the project. (3 points) The operating cash flows over the project life. (12 points) The (non-operating) terminal cash flow for this project. (6 points) The project's internal rate of return (IRR) and its net present value (NPV) at the firm's cost of capital of 12%. Also, calculate the payback period. (8 points) Assuming a reinvestment rate that is equal to the cost of capital of 12%, what is the modified internal rate of return (MIRR)? (2 points) Based on NPV and IRR, what would be your recommendation? Explain! (4 points) e) f) Montag Metals Exercise Years 0 2 Initial Investment New Equipment Net Working Capital Investment Initial Investment Operating Cash Flows Over the Project Life Revenues - Costs - Depreciation Expense (3 year MACRS) EBIT -Taxes @ 21% Operating Income after Tax + Depreciation Expense OCF Terminal Cash Flow Salvage Value Tax @ 21% Salvage Value after Tax Net Working Capital Return Terminal Cash Flow NPV Analysis Project Cash Flows Discount rate @ 12% Net Present Value (usum of present values) Internal Rate of Return Cumulative Project Cash Flows Payback Period MIRR 0.12