The state of Illinois has decided to replace all the electric bulbs used to light places like streets, highways, etc. in Cook County with new green technology, more efficient, longer life bulbs. The winning bid for the project was submitted by Edison Lights, Inc., a bulb manufacturer in West Virginia.

Edison does not have enough excess capacity at its existing West Virginia plant to guarantee the contract. Therefore, the company is considering opening a new manufacturing plant in Illinois on 10 acres of land purchased 10 years ago for $6 million. Based on a recent appraisal, the company feels it could receive $5 million on an after tax basis if it sold the land today.

It will cost Edison $5 million to build the new plant and $25 million to buy and install all the necessary equipment. If it starts immediately, plant construction and equipment installation will be complete on December 31, 2021, at which time Edison will pay the full $30 million cost for the project. Edison will therefore depreciate this cost on a seven-year MACRS schedule. The contract with the state of Illinois runs only for the four-year period 2022 2025. Edison feels that the equipment can be sold for 60 percent of its initial purchase when the contract expires. However, Edison plans to open another plant at that time in a different state and will use the equipment at the new plant.

The contract calls for the delivery of 700,000 bulbs per year at a price of $34 per bulb. Edison estimates that plant production will be 750,000 bulbs, 775,000 bulbs 800,000 bulbs and 740,000 bulbs, respectively in years 2022 2025. The excess production will be sold in the spot market at an average of $40 per bulb. Variable costs amount to $13 per bulb, and fixed costs are $2.5 million per year. To proceed with the contract requires that Edison maintains a NWC level equal to 5% of next years revenues starting December 31, 2021.

Once the contract expires, Edison is required by the state of Illinois to return the land to its original condition. This will occur in 2026. Edison will use an outside company to demolish the plant and any auxiliary structures, remove electricity and gas utility lines, etc.; it is estimated that this will cost the company $1 million. After the land is reclaimed, Edison plans to donate the land to the state of Illinois for use as a public park and recreation area.

Edison is subject to a 34 percent tax rate and has a 12 percent required return on new plant projects. Assume that a loss in any year will result in a tax credit. Also assume that Edison reports all cash flows at the end of each calendar year. For example, sales occur throughout the year, but Edison reports all its revenues for that year on December 31. Similarly, the first amount of depreciation is reported on December 31, 2022.

You have been asked by the CFO of the company to analyze the project. Should Edison take the contract with the state of Illinois? Please justify your recommendation using (more than one) accepted capital budgeting criteria.

Please report the projects cash flows in a tabular from similar to the grid provided below. Please use 2024 to explain in detail your calculations. Also, for items that appear only in one of the years, please explain in detail how you calculated them.