You have been hired as a financial consultant to assist Cell phones Corp. in assessing a capital budget project. CPC is a large publicly traded firm that is the market share leader in cell phones. The project is a new advance plasma cell phones. This will be a ten-year project. The company bought some land ten years ago for $1.5 million that has remained empty all these years. The land was appraised last week for $2 million (Land is not depreciated and for calculations of the remaining book value, assume that the land would be recorded with a book value of $2 million if project is undertaken). The company wants to build its new manufacturing plant on this land; the plant will cost $1.5 million to build. The manufacturing plant has a twenty-year tax life, and CPC uses straight-line depreciation. At the end of the project (i.e. the end of Year 10), the plant including the land can be sold for $2.5 million. New equipment at a cost today of $1 million is also needed. This equipment will be depreciated t zero by end of year 5 using straight-line depreciation method. It is estimated that at the end of year 5, the equipment is worthless (no salvage value though it will still have economic life and would be used for the project). The project will also use an empty small warehouse for storage. The warehouse is fully depreciated today. Currently, a company has proposed to lease the warehouse from CPC for $200,000 per year for 5 years. After 5 years the lease will be renewed but the lease amount will have an increase of 10% (and that will be the annual amount for year 6-10). The building will be worthless at the end of the 10 years.In addition, the project requires an investment in working capital today in the amount of $600,000 (nothing else after that). This investment will be recovered at the end of the project.

The company will incur $400,000 in annual cash fixed costs (fixed for the duration of the project). The plan is to manufacture 10,000 units of PCP's during the first year. Unit sales will increase 6% a year after first year. The sale price per unit is $1,000 and the price will not increase; the variable production costs are $850 per unit during the first year and they will increase !% a year thereafter. The company invested $1 million six months ago in research and development. The study showed that the sales of existing cell phones will decrease by 400 units (customers that will upgrade/switch to the new PCP) a year. The selling price of existing cell phones is $500 and the variable cost is $300 (both do not change over the life of the project). The discount rate for this type of projects is 10% and the corporate tax rate is 25%.

a. Are there any sunk costs in this problem? If so, name them and indicate amount.

b. What is the initial outlay (IO) for this project?

c. What is the operating cash flow (OCF) for each year for this project?

d. What is the termination value (TV) cash flow (also known as recovery cost or after-tax salvage value, or liquidation value of the assets) at the end of the project?

e. What is the NPV of this project? f. What can you say about the IRR and PI of this project? In conceptual terms.