The Sunshine Corporation is considering investing in a new widget manufacturing machine. The cost of the machine is $40,000, and the company anticipates the machine to be depreciated over five years to a residual value of $0. The widget manufacturing machine will result in sales of 3000 widgets per year. The price per widget that Sunshine Co. will charge its customers is $18, and is to remain constant. The widgets have a cost per unit to manufacture of $10. In the meanwhile, Sunshine Co. expects the new widget will cannibalise demand for some of the existing products at an amount of $3000 per year. At the end of four years, Sunshine Co. expects demand to fall to zero, due to anticipated advances in widget production technology. At that point, production will cease and Sunshine Co. expects to be able to sell the machine for $9000. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sunshine Co. needs to hold 2% of its annual sales in cash, 5% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 4% of its annual sales in accounts payable. Net working capital needed must be available from the beginning of the project, but will no longer be needed once the widget machine is sold. The firm is in the 30% tax bracket. The cost of capital is 12%.

(a) Estimate the after-tax cash flows for the project. To do this, you must present two tables. Table 1 should show the inputs of the accounting flows to determine the after- tax income. Table 2 should show the inputs to determine the after-tax cash flows. IMPORTANT: You must show each input in your table as a separate row. DO NOT group inputs together. Only show the two tables with calculation details.

(b) Using NPV analysis, should Sunshine Co. go ahead with the project? Show all your working.

(c) What is the payback period of this new project? If Sunshine Co. has a payback cut-off of 3 years, should they accept or reject the project?