You are the chief financial officer $($CFO$)$ of Tasman Pulp Mill Co$.($TPM$).$ Headquartered in Launceston, Tasmania, TPM is an ASX$-$listed company that employs more than $1,200$ people across its diversified business units in Tasmania, where the overall unemployment rate stands above $5\%,$ the highest among all states$/$territories in Australia. Mr$.$ David Hunt, the current deputy CFO of TPM$,$ has just announced that he will retire in $6$ months after $20$ years at TPM$.$ The chair of the recruitment committee of the board of directors at TPM asks you to help find the next deputy CFO who will be able to assist the chief executive officer $($CEO$)$ and you 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 deputy 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: 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 $$15,000,000.$ The new equipment will immediately reduce net working capital $($NWC$)$ by $$12,000,000.$

$(5)$ The current equipment requires annual fixed cash costs $($including overhead and operating$)$ of $$41,500,000,$ while the new equipment requires $$37,800,000.$

$(6)$ Manufacturing pulp using the current equipment incurs the following costs $($per tonne$)$ in addition to the costs stated in $(5)$: labour $$33\mathrm{.}5,$ material $$36\mathrm{.}5,$ variable overhead $$14\mathrm{.}25,$ and fixed overhead $$16\mathrm{.}5.$ The corresponding figures for the new equipment are $$17\mathrm{.}45,$ $$30\mathrm{.}20,$ $$12\mathrm{.}55,$ and $$20\mathrm{.}25,$ 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.

$($a$)$ Based on the NPV rule, should TPM upgrade to the new technology or continue to operate using its current equipment?