The Research & Development department has completed the design prototype at a cost of $750,000 and it is ready for production. To introduce this product line will require the purchase of additional production capacity which can be built and paid for during 2020 and ready to begin production on January 1, 2021. The cost to develop this capacity will be $70,950,000. It is estimated that $400,000 of additional net working capital will be needed to implement the project. All parties working on this project agree the level of risk involved is higher than the average risk of projects the company normally undertakes due to the newness of the technology involved.

Capital Investment Criteria: The board of directors has adopted the following criteria to be used in evaluating all capital investment projects: Payback period may not exceed 4 years. NPV must be positive using the firms weighted average cost of capital.

IRR must at least exceed the firms cost of capital.

When projects represent greater than average risk, a 2% adjustment to the cost of capital as well as the minimum IRR must be applied. If a project represents less than average risk, the cost of capital and IRR could also be reduced by 2%. When available capital is insufficient to pursue all projects which meet the above criteria, the project(s) which provides the largest impact to shareholder value will be adopted until the maximum amount available is fully utilized. You have been informed that $144 million is the maximum amount of capital investment the firm is willing to consider this year. Investments up to that amount will not result in any increase in the marginal cost of capital. Other Projects under Consideration: The other four projects you have analyzed represent average risks for the company and meet or exceed the criteria listed above.

The results of each are set forth below:

Project Risk Capital Investment Needed Net Present Value IRR Payback period Accept or Reject

Security System project Avg. $71,000,000 $601,000 15.0% 3.5 years ?

Humidifier project Avg. 69,000,000 $635,000 14.23% 4 years ?

Solar Lighting project Avg. 72,500,000 $722,000 14.4% 3.5 years ?

Central Vac. project Avg. 68,500,000 $742,000 14.5% 3.4 Years ?

Water heater project ? ? ? ? ? ?

Assignment: Analyze the water heater project to determine if it meets the criteria established by the board of directors and provide your recommendation concerning which project(s) should be pursued. Enter the relevant cash flows, Cost of Capital calculations and the NPV, IRR & Payback period findings on the following page in the designated boxes. Also enter the NPV, IRR & Payback Period along with your recommendations to accept or reject each of the five projects in the blank spaces provided above.