Reference no: EM132465462

Problem - Recent research has made possible the development of a sensing device. The company that own the Research (HALA) has just work on a process for mass-producing the device. The visibility study provide the following information:

The estimate of annual sales would be 2,000 units if the device were priced at $95,000 per unit (in dollars of the first operating year). HALA would need a new manufacturing plant. This plant could be built and made ready for production within 2 year. HALA would a 30-acre tract of land that would cost $1.5 million; the land could be purchased on December 31, 2019. The building would cost $5 million and would be depreciated according to the Declining Balance (DB) Method (with α = 0.40). (hint: Gains tax) The first payment of $1 million would be due to the contractor on December 31, 2020, and the remaining $4 million on December 31, 2021. The required manufacturing equipment would be installed and would be paid for on December 31, 2021. The equipment cost is $8 million, plus a further $500,000 for installation. The equipment would be depreciated according to the Straight-Line (SL) Method. (hint: Gains tax) The project would require an initial investment of $1 million in working capital. This investment would be made on December 31, 2021. The investments in working capital would be fully recovered at the end of the project year. The project's estimated economic life is 6 years (after the 2-year construction period). At the end of the project life time, the land is expected to have a market value of $2 million, the building a value of $3 million, and the equipment a value of $1.5 million. The estimated variable manufacturing costs would total 114 million of the dollar sales. Fixed costs would be $5 million for the first year of operations. Since the plant would begin operations on January 1, 2022, the first in flow cash would occur on December 31, 2023. HALA has $5.5 million budget for research and development (R&D). The company has already expensed $4 million to date on R&D. The remaining $1.5 million will be used as Continues Improvement for the device over 6 years (i.e., expense will be $250,000 yearly). (hint: Sunk cost) HALA's market interest rate (MARR) is 20%. Any capital gains will also be taxed at 40%.

Required -

1. Determine the Net Cash Flows, PW, and IRR of the project, with no inflation.

2. If by December 31, 2023 Sales prices, variable manufacturing costs, and fixed overhead costs are projected to increase with inflation rate of 5% yearly while by December 31, 2022 working capital is projected to increase with inflation rate of 4% yearly over the life of the project. Determine the Net Cash Flows, PW, and IRR of the project, with inflation.

3. Would you recommend that the firm accept the project?

4. Conduct a Sensitivity Analysis for the project with inflation and comment.