Your employer is considering a capital project that involves installing a new manufacturing line at a cost of $10,325,000. The line will be installed in an area of the factory that was refurbished in 2019. At that time, the refurbishment cost $1,650,000. If it is not employed by this project, that area of the factory will remain unused. The new manufacturing line, if built, will be depreciated on a straight-line basis over five years, to a salvage value of $0. If implemented, the project will cause an immediate increase in Inventory of $112,000. It will also cause immediate increases in Accounts Receivable of $2,300,000, Accounts Payable of $2,900,000, and Long-Term Debt of $4.2million.

If implemented, the project is expected to generate annual sales of $15,400,000 by the end of the first year. Sales are expected to increase 7% per year. COGS expense is expected to be of $7,336,000 during the first year. Thereafter, COGS is expected to remain at a constant percentage of Sales. Because operating efficiency is expected to improve each year, SG&A expense is expected to remain at $3,850,000 for each of the five years of the project. At the end of the projects five-year life, production will cease, and the manufacturing line will be sold for an estimated $1,000,000. At that time, Inventory, Accounts Receivable and Accounts Payable will return to their pre-project levels.

If the project is implemented, it will likely cannibalize sales of an existing product. The net impact of the cannibalization is expected to be a $1,800,000 annual reduction in pre-tax profits.

Your employers tax rate is 21%. The firm has 1.2 million shares of common stock outstanding. The firm requires a 13% rate of return on capital projects. Prepare a discounted cash flow analysis to determine whether your employer should implement this capital project. Your analysis should compute and show answers to each of the following questions. Highlight the cells that answer the following questions:

1. Initial investment amount (Year 0)

2. Calculation of total cash flow each year. Show all Revenues, Expenses, EBT, Net Income, and Operating Cash Flow in the computation (Years 1-5)

3. Calculation of NPV (using Excel NPV formula)

4. Calculation of IRR (using Excel IRR formula)

5. Should the company install this new manufacturing line?

6. How will the stock price change if this project is accepted (rounded to the nearest cent)?