URGENT: Please post all cell references and formulas.

You are considering replacing a current machine with a new machine that has an 8-year life. The purchase price of the new machine is $915,000 and transportation/installation expenses will be $120,000. This new machine falls into the 5-year MACRS classification for depreciation purposes. You expect that at the end of that 8-year life of the new machine, it will have a market value of $195,000. The current equipment has been in use for 6 years and has an expected remaining life of 8 years. Six years ago, you purchased the equipment for a total of $480,000. You are depreciating the current equipment on a straight-line basis to an expected $135,000 salvage value for accounting purposes. You estimate the market value of the equipment to be $264,000 currently and $125,000 at the end of 8 years. You estimate that inventories will increase by $163,000 and accounts payable will increase by $40,000 with the purchase of the new equipment. If you continue to operate the old machine, you estimate that you can produce and sell 124,000 units per year at the current price of $6 per unit. Variable costs currently associated with running the old machine are $1.93 per unit, and fixed costs associated with the old machine are currently $117,500 annually. If you switch to the new machine, you anticipate that you can produce and sell 142,500 units at a beginning price of $9.50 per unit. You expect the volume of sales associated with the new machine to grow at annual rate of 1% beginning in year two of your forecast. You estimate variable costs associated with running the new machine to be $4.75 per unit to start, while estimated fixed costs are $135,425 in the first year. Assume that the unit selling price, annual variable costs, and annual fixed costs for both the current and new machine under consideration will grow at a 2.0% annual rate of inflation beginning in year two of your analysis. Suppose that your initial investment in NWC is sufficient to support estimated sales for year 1. Moving forward, assume your cumulative NWC needs are expected to be 25% of the following year's projected incremental sales revenue. Depreciation for Tax Purposes: Modified Accelerated Cost Recovery System (MACRS) Ownership Year 5-year 1 20% 2 32% 3 19% 4 11.5% 5 11.5% 6 6% Your firm is financed with debt and common equity. Debt is comprised of a single issue of 4,500 bonds that are currently trading at a price of $1,035 each. The bonds were issued exactly two years ago today, each with a par value of $1,000, a coupon rate of 4.5%, and total maturity of 30 years. Interest coupons are paid on a semi-annual basis. For common equity, there are currently 245,000 shares outstanding, trading at a price of $17.00 each. Dividends are paid on an annual basis, and the last dividend paid was $1.25 per share. You expect dividends to grow at an annual rate of 3%. You have chosen to use an historical market risk premium estimate of 6%. It is your firms policy to use the current yield of 0.83% on 5-year T-bonds as your proxy for the nominal risk-free rate of return. Finally, you believe the estimated levered equity beta of your firm is 1.75. You determine that the current market value of your firms capital structure approximates the target capital structure and that the risk of the project under consideration is comparable to the overall risk level of the firms existing asset mix. Also, if there is more than one way to estimate a variable, it is your firms policy to use the average of the estimations. Assume that your firms marginal tax rate is 20%. Base Case Question 1.1 Estimate the weighted average cost of capital (WACC) for analyzing the decision to replace the old piece of equipment with the new one under consideration. Base Case Question 1.2 Should you replace the old piece of equipment with the new one under consideration? Substantiate your answer using NPV and IRR. Part One: After completing your analysis of the project described in the Base Case, suppose that instead of assuming a liquidation terminal flow in year 8, you believe it appropriate to assume that incremental annual cash flows will grow at an annual rate of 0.3% in years 9-20. Assume that there will be no additional incremental NWC investment necessary to support this continued production. In year 20, assume there will be no salvage value associated with either the new machine or the current machine, and that you may safely ignore any recovery of net working capital at that time. Question 1.3: Rerun your NPV/IRR analysis from Base Case Question1.2 incorporating this adjustment. Does your Base Caserecommendation still apply? Part One: Suppose, as a consideration separate from the Base Case project, you estimate the cash flows below for a small product line that is unrelated to your current lines of operation. You have also identified the additional data below for two firms that compete in the product line under consideration. Assume you have determined your firms Dividend Discount Model data to be irrelevant to this analysis. Question 1.4 (10 points): Should you undertake this new product line? Substantiate your answer using NPV. Year Estimated Cash Flow PB Company 0 $(560,000) D/E 0.45 1 $73,549 Beta 1.70 2 $118,650 Tax Rate 20% 3 $127,500 4 $133,420 J Company 5 $140,790 D/E 0.30 6 $148,635 Beta 1.58 Tax Rate 34%