Angelica Appliance Company is considering adding a new line to its product mix, and you are conducting the capital budgeting analysis for this proposed project. The production line would be set up in unused space in the firm's main plant. The machinery's invoice price would be approximately $350,000, another $15,000 in shipping charges would be required, and it would cost an additional $25,000 to install the equipment. The machinery has an economic life of 4 years, and the firm has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use. The new line would generate incremental sales of 1,500 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for S200 in the first year. The sales price and cost are both expected to increase by 2% per year, though no other variable is expected to change. Further to handle the new line, the firm's net working capital would have to increase in the first year of operation by an amount equal to 12% of sales revenues. Once increased, the working capital stays at that level until the project is finished. The firm's tax rate is 21%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (c), is 14%. Fill in the tables below and report results for required calculations: NPV IRR. PAYBACK Part 1: Input Data - Fill in the missing information + $350,000 $15,000 $25,000 Equipment cost Shipping charge Installation charge Economic Life Salvage Value Tax Rate Cost of Capital Units Sold 1 Sales Price Per Unit 2. Incremental Cost Per Unit 3 NWC/Sales 4 Given: Annual Depreciation Expense Depreciable Basis = Equipment + Freight + Installation Depreciable Basis = $390,000 Year 1 AN % 0.3333 0.4445 0.1481 0.0741 Basis $390 000 390,000 390,000 390,000 Depr $129,987 173.355 57,759 28,899 Remaining Book Value $260.013 86,658 28,899 0 Part 2: Construct FCF from project a. Fill in the operating data in the table: Annual Operating Cash Flows Year 1 Year 2 Year 3 Year 4 Units Unit price Unit cost Sales Costs Depreciation Operating income before taxes (EBIT) Taxes EBIT (1-T) Depreciation 3 Net operating CF (OCF) 1 b: Estimate the required net working capital for each year, and the cash flow due to investments in net working capital. Annual Cash Flows due to Investments in Net Working Capital Year 0 Year 1 Year 2 Year 3 Year 4 Sales NWC (% of sales) CF due to investment in NOWC) Parte: Calculate the after-tax salvage cash flow. After-tax Salvage Value Based on facts in case: Salvage value Book value Gain or loss Tax on salvage value Net terminal cash flow d. Calculate the net cash flows for each year. Based on these cash flows and the average project cost of capital, what are the project's NPV, IRR, PI, and payback? Do these indicators suggest that the project should be undertaken? Find Projected Net Cash Flows and NPV, IRR Year 0 Year 1 Year 2 Year 3 Year 4 Investment Outlay: Long Term Assets Operating Cash Flows from Project Change in CF due to investment in NWC Salvage Cash Flows Net Cash Flows NPV = IRR = P = Find Payback Years 2 0 3 3 Cash Flow Cumulative Cash Flow for Payback 5 Payback = B 8 YOUR 'FINAL ANSWERS:" (a) Based on the calcuations you have made to the left, would you recommend that Angelica Appliance take the project? Briefly explain your logic, and (b) Would your conclusion change if the WACC were to increase to 17%. Briefly explain your logic. FINAL ANALYSIS