W & T Racket Designs is the leading racquet company. They are known for their innovation of new technology for

racquet sports. W & T is planning on implementing a new racquet into production to replace their old tour model

racquet. The old model was very popular with most customers, but W & T wants to implement new technology to

improve this model. The company tries to produce a new racquet every $38$ years to try and lead industry standards.

When a new racquet design is introduced, the company must invest in a new mold which includes updating the existing

machinery.

The company has invested roughly $$1$ million into Research & Development of the new technology. The new technology

implemented will be called Flex$$Braid$.$ Flex$$Braid uses a combination of graphite, carbon, and other composites woven

together to form the frame of the racquet. W & T expects Flex$$Braid to give the racquet more rigidity and also increases

feel and control, which is what most of their clientele want.

The mold for the old racquet was produced $3$ years ago at a cost of $$150,000.$ Shipping on the old mold was $$5,000.$ In

addition, W & T incurred a set$$up fee of $$20,000.$ If the old racquet is not replaced, management estimates variable

costs of $$55$ per racquet, fixed costs of $$50,000$ annually, and a production capacity of $12,000$ racquets annually over the

next $5$ years. It is estimated that the old racquet will continue to sell for $$120$ for at least the next $5$ years. In addition,

W & T currently has an offer of $$20,000$ for the old mold. If not replaced, it is estimated that the old mold will only sell

for $$12,0005$ years from today. For this reason, the old mold is being depreciated on a straight$$line basis to a book

value of $$12,000$ over $8$ years. The company$$s marginal tax rate is $35\%,$ and its cost of capital is $15\%.$ This project is

equally as risky as a typical company project. Therefore, the required return on this project is equal to the company$$s

cost of capital.

The question that has risen is what type of mold should be used to produce the new racquet? Due to the new racquet$$s

material, the old mold will not be sufficient. Due to the differing qualities in the potential new molds, the revenues,

expenses, initial investments, and future market values of the new molds can vary tremendously. W & T has several

options for the new mold.

One option that W & T can use is Mold #$183$:

The cost of this mold will be $$496,748.$ Due to the distance from the factory, shipping on this mold will be $$7,947,$ and

installation will be $$39,589.$ It is estimated that variable production costs on this new mold will be $$47$ per racquet, fixed

costs of $$67,709$ annually, and a production capacity of $12,047$ racquets annually over the next $5$ years. If this mold is

selected, the racquet is expected to sell for $$139.$ Sales on W & T$$s other existing racquets are expected to be $$5,000$

lower each of the next $5$ years with the introduction of this top notch racquet. The accounting department has informed

you that this mold will depreciate using a $5$year MACRS depreciation schedule. It is expected that this mold will be sold

at the end of $5$ years for $$36,609.$ In addition, if this mold is selected the level of inventory on hand is expected to rise

by $$2,256,$ the level of supplies on hand is expected to decrease by $$1,853,$ and $$600$ of the inventory can be financed

through the supplier with an increase in accounts payable.

$1.$ Calculate the estimated Net Initial Investment and estimated incremental cash flows for the next $5$ years if the

existing mold is replaced with this new mold.

$2.$ Calculate NPV$,$ IRR, Profitability Index, Payback, and Discounted Payback for your project.

$3.$ At a minimum, compare your result to $3$ other molds $($be sure their answers are correct$).$ Which mold number

would you choose? Explain why