You have an internship at Masan Food and are asked to analyze a capital budgeting case where the company wants to add a new type of fish sauce Chin-su the King to its product mix. The following information about the product is estimated by Masans financial manager and passed on to you:

Project life : 3 years

The production would need to use currently available, existing machinery of the company. The company spent $10,000 last year to renovate this machinery (for some repainting and maintenance). If the machinery is not used for this project, Masan would consider it for one of the following options:

Option 1: Sell it now for $180,000 cash

Option 2: Lease it on a 5-year contract for $45,000 (after-tax) each year, starting one year from now. After 5 years of being leased, the machine would have no value to the company.

If the company decides to use the machinery for this project, it would be depreciated according to a 3-year property MACRS schedule. At the end of the project life, it could be sold as scrap for $ 15,000.

The project requires an initial investment in working capital of $15,000, which is fully recovered upon closure of the project

This project Chin-su the King is expected to generate sales of 1,450 bottles per year at a cost of $120 per bottle in the first year, excluding depreciation. Each bottle can be sold for $200 in the first year. The sales price and cost are expected to increase by 10% per year due to inflation.

The company takes a bank loan to finance the project, and is expected to pay $2,500 as interest expense per year over the life of the project.

The companys tax rate is 35%, and its overall cost of capital (WACC) is 10%.

Questions:

a.Assume that Masan Food (MSN) operates in the Food Processing Industry only. Its core business is to manufacture instant noodles, fish sauceIf the company is to expand to a new fish sauce product - Chin-su the King, what are your comments about the discount rate that could be used to discount the project cash flows?

b.Is there a tax effect when selling the machinery at the end of the project life? Why is that the case?

c.Calculate the project cash flows for each year

d.Should Masan Food invest in this project? Why?

e.(bonus question) If Masan Food is to consider another investment in Leather Processing Industry (which, according to the companys CEO, a totally strange animal), what is the best policy to determine the discount rate for this new investment? Any thoughts about why the company would want to invest in a different industry (other than its core business)?