The Mulligan company, a manufacturer of electrical parts, is evaluating several proposals for the upcoming capital budget year and you were asked to perform the analysis and submit a report with your recommendations and justification. The company's a marginal tax rate is 21%, and cost of capital is 11%, evaluate the following proposals. The company needs to decide whether to replace an existing machine with a new one with higher production capacity. The new machine will cost $200,000. The company plans on keeping the new machine for 6 years when it is expected to be sold for 51,000. The current machine, obtained two years ago at an original cost of $120,000, could be sold for $36,000 today if it is replaced, otherwise, it will be kept for six more years, when it is expected to have a market value of $10,000. Both machines are classified into five-year MACRS life. Due to increased production, replacing the existing machine will require the following changes in net working capital in the initial period: an increase in inventory of $12,000, an increase in accounts receivable of $13,000, an increase in the cash balance of $11,500 and an increase in accounts payable of $14,000. Subsequently, net working capital will have to be maintained at a level of 20% of sale. It will then be recovered at the end of the project's life. (Since cash flows are assumed to occur at the end of each year, there will not be a change in NWC in the last year). The new equipment will increase sales from 14,000 units to 20,000 the first year and sales is expected to grow by 4% annually. Sale price is expected to be $20 per unit and variable cost $12 per unit. Annual general and administrative expense is expected to increase by $6,500. The second decision involves evaluating two mutually exclusive project that are somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and decided to apply an adjustment factor of +2% to the cost of capital for both projects. The New asset that will be acquired is be housed in a fully depreciated building, owned by the company, with an after-tax market value of 1.2 million dollars which is not expected to appreciate over next 6 years. To generate estimate regarding sales and costs associated with the new product, the company hired a marketing firm and paid $35,000 for its service. Following are the information regarding the two mutually exclusive projects. Project A is a six-year project that requires an initial fixed asset investment of $3 million. The fixed asset falls into the seven-year MACRS class. Based on $20 per unit sale price, the project is estimated to generate $2,050,000 in sales during its first year, with production costs of $950,000. Sales and costs are expected to grow at 3% annually. The project requires a single initial investment in net working capital of $285,000 which is expected to be recovered in six years when the project is terminated. The fixed fixed asset will have a market value of $225,000 at the end of its six years life. Project B is also a six-year project that requires an initial fixed asset investment of $1.9 million that falls into the seven-year MACRS class. The fixed asset will also require an additional $100,000 in shipping and installation. The marketing firm predicts that first year sales related to the project will be 62,500 units, at a price of $16 per unit, and grow at an annual rate of 4%. Operating costs related to the project are predicted to be 22% of sales. The project will also require an initial net working capital investment of $150,000 which is expected to be recovered at the end of six years. The asset is expected to have a market value of $22,000 at the end of the six years when the project is terminated. Instructions: This project is due before midnight on 7/27. It should be submitted by uploading your work using the Individual Project link on eLearning Homepage. It should be submitted as two attachments, a one- page words document with summary, conclusion and recommendations, and an excel file showing your work. Your excel file must include separate worksheets for each of the three projects and fourth worksheet comparing the two mutually exclusive projects A&B. Your analysis should cover the following: For the replacement project: 1) Use excel to build a model to estimate cash flows. 2) Calculate NPV, PI, and IRR 3) Should the old machine be replaced? Why? 4) Management is unsure of some of the assumption and you were asked to generate a scenario summery showing NPV and IRR for each of the following cases. (Make sure you rename all inputs and outputs) a. Case 1: Price per unit is 22, cost per unit is 11 and growth rate is 4.5% b. Case 2: Price per unit is 19, cost per unit is 13, and growth rate is 3.5% c. Case 3: Price per unit is 17, cost per unit is 15, and growth rate is 3% For the two mutually exclusive projects A&B: 1) Use excel to build a model to estimate cash flows for each of the two projects 2) Calculate NPV, Pl and IRR for each project. 3) Management thinks unit sale, for projects A&B, in the above analysis, are probably accurate to within +10 percent. Use data table to Evaluate the sensitivity of your base-case NPV to changes in number of units for project A &B. (move at +/- 2% from number of units in base case) 4) Which project should be undertaken, if any, and why? 5) Graph the Net Present Value Profile for the two projects. 6) At what discount rate would the company be indifferent between the two projects? What is the relevance of this rate? The Mulligan company, a manufacturer of electrical parts, is evaluating several proposals for the upcoming capital budget year and you were asked to perform the analysis and submit a report with your recommendations and justification. The company's a marginal tax rate is 21%, and cost of capital is 11%, evaluate the following proposals. The company needs to decide whether to replace an existing machine with a new one with higher production capacity. The new machine will cost $200,000. The company plans on keeping the new machine for 6 years when it is expected to be sold for 51,000. The current machine, obtained two years ago at an original cost of $120,000, could be sold for $36,000 today if it is replaced, otherwise, it will be kept for six more years, when it is expected to have a market value of $10,000. Both machines are classified into five-year MACRS life. Due to increased production, replacing the existing machine will require the following changes in net working capital in the initial period: an increase in inventory of $12,000, an increase in accounts receivable of $13,000, an increase in the cash balance of $11,500 and an increase in accounts payable of $14,000. Subsequently, net working capital will have to be maintained at a level of 20% of sale. It will then be recovered at the end of the project's life. (Since cash flows are assumed to occur at the end of each year, there will not be a change in NWC in the last year). The new equipment will increase sales from 14,000 units to 20,000 the first year and sales is expected to grow by 4% annually. Sale price is expected to be $20 per unit and variable cost $12 per unit. Annual general and administrative expense is expected to increase by $6,500. The second decision involves evaluating two mutually exclusive project that are somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and decided to apply an adjustment factor of +2% to the cost of capital for both projects. The New asset that will be acquired is be housed in a fully depreciated building, owned by the company, with an after-tax market value of 1.2 million dollars which is not expected to appreciate over next 6 years. To generate estimate regarding sales and costs associated with the new product, the company hired a marketing firm and paid $35,000 for its service. Following are the information regarding the two mutually exclusive projects. Project A is a six-year project that requires an initial fixed asset investment of $3 million. The fixed asset falls into the seven-year MACRS class. Based on $20 per unit sale price, the project is estimated to generate $2,050,000 in sales during its first year, with production costs of $950,000. Sales and costs are expected to grow at 3% annually. The project requires a single initial investment in net working capital of $285,000 which is expected to be recovered in six years when the project is terminated. The fixed fixed asset will have a market value of $225,000 at the end of its six years life. Project B is also a six-year project that requires an initial fixed asset investment of $1.9 million that falls into the seven-year MACRS class. The fixed asset will also require an additional $100,000 in shipping and installation. The marketing firm predicts that first year sales related to the project will be 62,500 units, at a price of $16 per unit, and grow at an annual rate of 4%. Operating costs related to the project are predicted to be 22% of sales. The project will also require an initial net working capital investment of $150,000 which is expected to be recovered at the end of six years. The asset is expected to have a market value of $22,000 at the end of the six years when the project is terminated. Instructions: This project is due before midnight on 7/27. It should be submitted by uploading your work using the Individual Project link on eLearning Homepage. It should be submitted as two attachments, a one- page words document with summary, conclusion and recommendations, and an excel file showing your work. Your excel file must include separate worksheets for each of the three projects and fourth worksheet comparing the two mutually exclusive projects A&B. Your analysis should cover the following: For the replacement project: 1) Use excel to build a model to estimate cash flows. 2) Calculate NPV, PI, and IRR 3) Should the old machine be replaced? Why? 4) Management is unsure of some of the assumption and you were asked to generate a scenario summery showing NPV and IRR for each of the following cases. (Make sure you rename all inputs and outputs) a. Case 1: Price per unit is 22, cost per unit is 11 and growth rate is 4.5% b. Case 2: Price per unit is 19, cost per unit is 13, and growth rate is 3.5% c. Case 3: Price per unit is 17, cost per unit is 15, and growth rate is 3% For the two mutually exclusive projects A&B: 1) Use excel to build a model to estimate cash flows for each of the two projects 2) Calculate NPV, Pl and IRR for each project. 3) Management thinks unit sale, for projects A&B, in the above analysis, are probably accurate to within +10 percent. Use data table to Evaluate the sensitivity of your base-case NPV to changes in number of units for project A &B. (move at +/- 2% from number of units in base case) 4) Which project should be undertaken, if any, and why? 5) Graph the Net Present Value Profile for the two projects. 6) At what discount rate would the company be indifferent between the two projects? What is the relevance of this rate