The Philips Corporation is considering adding a new product line by making an investment in a new electric one blade razor manufacturing plant that has an estimated economic life of four years. The capital budgeting analysis is being conducted by Alexandre, a recent business graduate from Rennes School of Business, Rennes, France. The cost of the plant has three elements i.e. the invoice price of the plant is $200,000, shipping charges are &10,000, and installation cost is $30,000. The plant will be depreciated straight line over its four-year life to a residual value of zero.

The one-blade razor plant will result in sales of 1,250 units per year for four years. The price per razor that Philips will charge its customers is $200 each and the cost is $100 per unit.

The plant is installed in an existing space that could be rented at $25,000 per year. There will be a fixed annual overhead cost of $20,000 to manage this plant. Installation of the plant and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Philips needs to hold 3% of its annual sales in cash, 6% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 40% tax bracket and has an overall weighted average cost of capital of 10%. Following three scenarios are expected regarding the economic conditions that may impact the sales and profitability of the project.

QUESTIONS

1. 1- If the economic conditions stay normal, number of units sold will remain the same, however, sales

   price and per unit costs are expected to increase by 3% due to inflation.

2. 2- If there is recession in the economy, number of units sold, sales price, and per unit costs are expected to remain the same.

3. 3- If there is growth in the economy, number of units sold will increase by 10% annual, and sales price and per unit costs are expected to increase by 3% due to inflation.

   a) Calculate annual net working capital requirements for Philips Corporation showing all the detailed heads (cash, accounts receivable, inventory, accounts payable) and calculate the annual change in net working capital requirements for the three expected scenarios, separately.

   b) Calculate free cash flows while showing calculations of the following heads: Sales, CGS, Gross profit, annual overhead, opportunity cost (if any), depreciation, net income, capital expenditure, and net working capital for the three expected scenarios, separately.c) Calculate NPV of the project and comment the three expected scenarios, separately. Points

   d) Calculate IRR of the project and comment the three expected scenarios, separately Points

   e) Decision with reasons: Should we invest in the project keeping in mind that the three expected scenarios have the same probability or equal chances of occurrence?