Ventura Inc. is a company specialised in producing outdoor clothing geared for all$-$seasons

weather and most of the outdoor activities. The company was formed in $2009,$ and its

products have gradually gained popularity and trust as being a durable, high$-$quality and high$-$

taste clothing. It was able to considerably grow its market share over the past decade on the

expense of its competitors. John Porter, the Finance Director of Ventura Inc. needs to

accomplish five tasks and presents his recommendations to the board of directors during the

upcoming board meeting in two$-$week time.

The first task is to analyse the feasibility of replacing one of the main old production lines for

producing waterproof jackets with a new one of a more advanced technology that uses more

breathable fabrics. The marketing department is recommending this project as they expect

the new technology will have a considerable positive impact on their products$$ demand and

accordingly on sales. The marketing team has undergone a market$-$research last year that

costed the company $$75,000$ in order to verify the potential prospects of this project. The

operations department has also confirmed that there will be some improvements in

efficiencies. Both departments have provided John with the necessary data to examine the

financial feasibility of the project. The new production line will cost $$8$M and is expected to

have a salvage value in $6$ years for $$1$M$.$ The existing production line was bought $2$ years ago

for $$3$M$,$ and can be sold today at a market value of $$900$K$.$ If not sold now, this old machinery

is expected to have a salvage value of $$200$K in $6$ years. The new production line is expected

to generate sales in year $1$ for $$6$M and thereafter sales are forecasted to grow by $4\%$ a year

for the coming $6$ years. This is as opposed to the current production line which was expected

to generate $$3\mathrm{.}5$M of sales next year and grows by $2\%$ for the coming $6$ years. Manufacturing

costs are the same under both production lines. The new production line requires an initial

investment in working capital of $$450$k$.$ Thereafter, working capital is forecasted to grow at

the same growth rate of revenues of $4\%.$ CCA rate is $20\%.$ Also note that:

$$ The unlevered cost of capital $($in an all$-$equity scenario$)=17\%,($and that$$s for the

company$$s current business as well as the suggested new product$)$

$$ The company$$s projected cost of debt $($interest rate$)$ for the year $2024=7\%$

$$ The company$$s current weighted average cost of capital $($WACC$)=14\%$

$$ The tax rate $=40\%$

$$ Dividend pay$-$out ratio in $2023=60\%$

Questions:

Attempt accomplishing all five tasks of John Porter, as follows:

For the first task:

a$)$ Calculate the NPV & the IRR of the replacement of the production line.

b$)$ Determine whether the company should proceed with this project or not and

why?

P$.$s$.$ Use the company$$s current WACC