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Watersports Corporation ( WC ) designs, manufactures, and markets several lines of sporting boats designed to be powered by proprietary electric engines. The
Watersports Corporation WC designs, manufactures, and markets several lines of sporting boats designed to be powered by proprietary electric engines. The company is evaluating the development of a new line of power boat called the Lightning Boat, and this would require an expansion of its production plant to enable it to produce the Lightning Boat for the next years. Last year, the company spent $ to do marketing research analysis to estimate market demand for a new power boat line. The company also spent last year $ for an engineering analysis for the new electric engine for the Lightning Boat. The current expansion scenario would have total construction costs of $ million and it would take about months to complete ie essentially upfront WC would also put in $ million of new production machinery and equipment. Inventory raw materials, workinprocess, finished goods investment needed for the expansion to get started would be $ million. Except for the inventory investment, the total upfront investment can be completely depreciated assuming no salvage value using the straightline method over four years which is comparable to an accelerated depreciation method for income tax purposes The company expects to incur $ million in incremental annual interest expense, and the company expects it could increase annual dividends by $ per share there are million shares outstanding Incremental sales for this project are based on forecast demand of units in the first year; units in the second year; units in the third year; units in the fourth year; and, units in the fifth year. Average sales price per unit is expected to be $ in Year ;$ in Year ; $ in Year ; $ in Year ; and $ in Year Cost of goods sold is estimated to be of total sales each year, and incremental fixed costs are estimated to be $ million per year. At the end of the project's estimated life, the company estimates it could sell the purchased machinery and equipment for $ million and the expected the book value for these items would be zero at that time. Also at the end of the project, $ of inventory could be liquidated at its original cost with no income tax effect The company's income tax rate is expected to be for ordinary income and for capital gains income: If WC does this project, it will immediately sell some existing surplus equipment for a price of $ million which has a current book value of $ million and which would have future depreciation of $ per year for the next four years. WCs weighted average cost of capital is and WC it believes this project should earn at least a average annual return. Put the solutions to the following questions into an Excel spreadsheet with appropriate detail, and use whole dollars in the spreadsheet.
What is the upfront total aftertax cash costs for this proposed project?
What are the Total Annual Free Cash Flows for Year Year Year
What is the Total AfterTax Operating Cash Flow for Year exclude Terminal Yearspecific items
What is Terminal Yearspecific Cash Flow ie AfterTax Salvage Value excluding the Annual Operating Cash Flow portion Show your work in appropriate detail.
IsAre there any irrelevant cash flows mentioned in this problem? If so what isare itthey
Are there any sunk costs for this project? If so what are they?
Are there any opportunity costs for this project? If so what are they?
What is the Net Present Value for this project proposal?
What is the Internal Rate of Return for this project proposal?
Would this project be a good investment? Why? Calculate at least two capital budgeting evaluation methods but use only one to decide if the proposed project is a good investment
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