Tito's Handmade Vodka of Austin is considering expanding its production capacity by purchasing new distilling equipment. The firm has just completed a $10,000 feasibility study to analyze the decision to buy the equipment, resulting in the following estimates:

Capital Expenditures: The cost of the distilling equipment is $100,000 and needs to be paid immediately (i.e., year 0). The equipment will last for ten years. The firm expects to recover a salvage value of $10,000 in year 10 (i.e., 10 years from now).

Marketing: Once the equipment is operating in year 1, the extra capacity is expected to generate $100,000 in additional sales in each of the subsequent ten years (i.e., year 1, year 2, ..., year 10).

Operations: The disruption caused by the installation will decrease sales revenues by $20,000 in year 0. The costs of goods (COGS) sold are 60% of their sales revenues. The increased production will require additional inventory on hand of $20,000 to be added in year 0. You will continue to need the inventory of $20,000 until year 9 and it will be fully recovered in year 10 (i.e., the required inventory will be zero in year 10). The firm expects receivables to be 20% of revenues and payables to be 10% of the COGS.

Human Resources: The expansion will require additional sales and administrative costs of $10,000 per year from year 1 through year 10.

Accounting: The equipment will be depreciated equally every year over the 10-year life of the equipment. Thus, the book value after depreciation in year 10 will be zero. Tito's marginal corporate tax rate is 20% and Tito expects to remain highly profitable in the foreseeable future.

1. Compute the NPV, the IRR, and the SIMPLE PAYBACK of the project. Use a discount rate of 12%
2. In the base case scenario, you assume annual additional sales between year 1 and year 10 to be equal to $100,000. At which annual additional sales does the project just break even (Hint: Use Solver in Excel)?

a. Base-Case Scenario

b. Break-Even Sales