Finance and Accounting capital budgeting problem

Project description
This is a capital budgeting problem as described in the attached Appendix . Analysis needs to be produced with Excel spreadsheet software and an easy-to-read file copy

needed.

Trendsetter Information Appliances Corp. (TIA) manufactures personal computers, smartphones, music players, and other information appliances and software. The

company is evaluating the expansion of its manufacturing plant to enable it to take on a new customer segment for the next 5 years. Last year, the company spent

$86,000 to do marketing research analysis to estimate market demand for new customer segments. The current expansion scenario would have total construction costs of

$850 thousand and it would take about 60 days to complete (i.e., essentially up-front). TIA would also put in $425 thousand of new machinery and equipment. Inventory

(raw materials, work-in-process, finished goods) investment needed for the expansion to get started would be $135 thousand. Except for the inventory investment, the

total upfront investment can be depreciated using the straight-line method over four years. The company expects to incur $110 thousand in incremental annual interest

expense, and the company expects it could increase annual dividends $0.15 per share (there are 985,000 shares outstanding). Incremental sales for this project are

based on forecast demand of 443 units in the first year, 490 units in the second year, 560 units in the third year, 595 units in the fourth year, and 290 units in the

fifth year, with an average selling price of $3,000 per unit. Cost of goods sold is estimated to be 68% of total sales each year, and incremental fixed costs are

estimated to be $95,000 per year. At the end of the project’s estimated life, the company estimates it could sell the purchased machinery and equipment for $150,000

and the expected the book value for these items would be zero. Also at the end of the project, $70,000 of inventory could be liquidated at its original cost (with no

income tax effect). The company’s income tax rate is expected to be 34% for ordinary income and 18% for capital gains income. If TIA does this project, it will

immediately sell some existing surplus equipment for a price of $320,000 which has a current book value of $215,000 and which has future depreciation of $32,500 for

the next three years. TIA’s weighted average cost of capital is 11%, so it believes this project should earn at least 13% average annual return.

1. What is the upfront total after-tax cash costs for this proposed project?

2. What are the Total Annual Free Cash Flows for Year 1? Year 2? Year 3?

3. What is the Total After-Tax Operating Cash Flow for Year 5 (exclude Terminal Year-specific
items)?
4. What is Terminal Year-specific Cash Flow (i.e., After-Tax Salvage Value excluding the Annual
Operating Cash Flow portion)? Show your work in appropriate detail.

5. Is(Are) there any irrelevant cash flow(s) mentioned in this problem? If so, what is(are) it(they)?

6. Are there any sunk costs for this project? If so, what are they?

7. Are there any opportunity costs for this project? If so, what are they?

8. What is the Net Present Value for this project proposal?

9. What is the Internal Rate of Return for this project proposal?

10. Would this project be a good investment? Why?