You are a senior recruiter at Best People, a recruitment agency. Tasman Pulp Mill Co. (TPM), a long-time client of Best People, is a Launceston-headquartered & ASX-listed company that employs more than 1200 people across its diversified business units in Tasmania, where the overall unemployment rate is above 7.5%. Mr. David Smith, the current chief financial officer (CFO) of TPM, has just announced that he will retire in 6 months after 25 years at TPM. The chair of the recruitment committee of the board of directors at TPM asks you to help find the next CFO who will be able to assist the chief executive officer (CEO) to continue the success and growth that TPM has seen over the last two decades or so. You indicate to the committee chair that, because TPM continues to expand its operations via either acquiring other businesses or upgrading current facilities, it is critically important the incoming CFO has thorough understanding of project analysis and capital budgeting. You also suggest that the best way to test the candidates knowledge and practical skills is to ask the candidates to analyze a simulated case in addition to the usual formal interview. Part I (10 marks): The committee chair agrees with you and asks you to come up with a mock case. The information listed below will be given to the candidates. (1) TPM has an after tax cost of capital of 12%; it will pay 9% on any new bank borrowing; the current tax rate is 30%. (2) A new manufacturing technology has just become available. Adopting this new technology requires TPM to upgrade its manufacturing equipment. Compared to the existing technology, the new technology is faster and requires fewer workers but at the same time is less environmentally friendly. (3) The current pulp mill equipment has an annual output of 500,000 air dried tonnes (ADt) of pulp which currently sells at $124 per tonne. In contrast, the new equipment will have an annual output of 600,000 ADt of pulp. (4) The current equipment was purchased three years ago for $49,000,000. It has a book value of $28,000,000 and another four years of life remaining with no salvage value. It can be sold on the secondary market today for $11,000,000. The new equipment costs $75,000,000 (will be funded by bank loans) and is expected to last five years with an estimated salvage value of $15,000,000. The new equipment will immediately reduce net working capital (NWC) by $1,200,000. (5) The current equipment requires annual fixed cash costs (including overhead and operating) of $4,150,000, while the new equipment requires $3,780,000. (6) Manufacturing pulp using the current equipment incurs the following costs (per tonne) in addition to the costs stated in (5): labour $33.5, material $36.5, variable overhead $14.25. The corresponding figures for the new equipment are $17.45, $30.20 and $12.55, respectively. All candidates are required to answer the following questions. The committee chair asks you to prepare the correct solutions so the answers by the candidates can be checked. Assume there is no inflation during the whole period and both machine can be replaced at the end of their respective project life. (a) Should TPM upgrade to the new technology or continue to operate using its current equipment? (b) Will your answer be different if neither project can be replaced at the end of their respective life? (c) Conduct risk evaluations (using the sensitivity analysis) of adopting the new technology by considering the following factors: output using the new technology may be overestimated; the reduction in NWC may be overestimated; due to continuous development in the industry, the equipment may worth less than $15,000,000 in five years; the labour cost per tonne may be underestimated. Note: Your answers to this part will be different from those of other groups depending on what values you choose. Each group only needs to choose one particular value for each of these variables. (d) What types of factors (financial and/or non-financial) TPM must also consider when evaluating the new technology. Part II (3 marks): The committee chair also asks you to prepare a list of questions which will be used in the formal interview to test the candidates theoretical understanding of project analysis and capital budgeting. The Chair indicates that the number of questions should be no fewer than three but no more than five. The Chair further indicates that the majority on the interview panel have no or little background in project analysis and capital budgeting; therefore they rely on the answers prepared by you to conduct the interview and select the most suitable candidate for the position of CFO.