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 $5$ years. Last year, the company spent $$430,000$

to do marketing research analysis to estimate market demand for a new power boat line. The company

also spent last year $$300,000$ for an engineering analysis for the new electric engine for the Lightning

Boat. The current expansion scenario would have total construction costs of $$9\mathrm{.}75$ million and it would

take about $6$ months to complete $($i$.$e$.,$ essentially up$-$front$).$ WC would also put in $$6\mathrm{.}5$ million of new

production machinery and equipment. Inventory $($raw materials, work$-$in$-$process, finished goods$)$

investment needed for the expansion to get started would be $$1\mathrm{.}95$ million. Except for the inventory

investment, the total upfront investment can be completely depreciated assuming no salvage value using

the straight$-$line method over four $(4)$ years $($which is comparable to an accelerated depreciation method

for income tax purposes$).$ The company expects to incur $$1\mathrm{.}2$ million in incremental annual interest

expense, and the company expects it could increase annual dividends by $$0\mathrm{.}02$ per share $($there are $20$

million shares outstanding$).$ Incremental sales for this project are based on forecast demand of $450$ units

in the first year; $525$ units in the second year; $550$ units in the third year; $570$ units in the fourth year; and,

$600$ units in the fifth year. Average sales price per unit is expected to be $$70,000$ in Year $1$; $$73,000$ in

Year $2$; $$76,000$ in Year $4$; $$79,000$ in Year $4$; and $$82,000$ in Year $5.$ Cost of goods sold is estimated to

be $80\%$ of total sales each year, and incremental fixed costs are estimated to be $$2\mathrm{.}1$ million per year. At

the end of the project$$s estimated life, the company estimates it could sell the purchased machinery and

equipment for $$1\mathrm{.}1$ million and the expected the book value for these items would be zero at that time.

Also at the end of the project, $$700,000$ of inventory could be liquidated at its original cost $($with no income

tax effect$).$ The company$$s income tax rate is expected to be $25\%$ for ordinary income and $21\%$ for capital

gains income. If WC does this project, it will immediately sell some existing surplus equipment for a price

of $$1\mathrm{.}25$ million which has a current book value of $$0\mathrm{.}7$ million and which would have future depreciation

of $$175,000$ per year for the next four years. WC$$s weighted average cost of capital is $12\mathrm{.}50\%,$ and WC

it believes this project should earn at least a $15\mathrm{.}00\%$ average annual return. Put the solutions to the

following questions into an Excel spreadsheet with appropriate detail, and use whole dollars in the

spreadsheet.

$1.$ What is the upfront total after$-$tax cash costs for this proposed project?

$2.$ What are the Total Annual Free Cash Flows for Year $1?$ Year $2?$ Year $3?$

$3.$ What is the Total After$-$Tax Operating Cash Flow for Year $5($exclude Terminal Year$-$specific

items$)?$

$4.$ What is Terminal Year$-$specific Cash Flow $($i$.$e$.,$ After$-$Tax Salvage Value excluding the Annual

Operating Cash Flow portion$)?$ Show your work in appropriate detail.

$5.$ Is$($Are$)$ there any irrelevant cash flow$($s$)$ mentioned in this problem? If so$,$ what is$($are$)$ it$($they$)?$

$6.$ Are there any sunk costs for this project? If so$,$ what are they?

$7.$ Are there any opportunity costs for this project? If so$,$ what are they?

$8.$ What is the Net Present Value for this project proposal?

$9.$ What is the Internal Rate of Return for this project proposal?

$10.$ 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$).$