Case ABC Company's research and development department has been applying its expertise in microprocessor technology to develop a small computer specifically designed to control home appliances. Once programmed, the computer system automatically controls the heating and air-conditioning systems, security system, water heater, and even small appliances such as a coffee maker. By increasing the energy efficiency of a home, the appliance control computer can save on energy costs and hence pay for itself. The project evaluation effort has reached the stage at which a decision about whether to go forward with production must be made. ABC Company's marketing department plans to target sales of the appliance control computer to the owners of larger homes; the computer is cost-effective only for homes with 2,000 or more square feet of heated and air- conditioned space. The marketing vice president believes that annual sales would be 25,000 units if the appliance control computers were priced at $2,200 each. The engineering department has estimated that the firm would need a new manufacturing facility which could be built and made ready for production in 2 years, once the "go ahead" decision is made. The plant would require a 25-acre site, and ABC Company currently has an option to purchase a suitable tract of land for $1.2 million. If the decision is made to go ahead with the project, building construction could begin immediately and would continue for 2 years. Because the project has an estimated economic life of 6 years, the overall planning period is 8 years: 2 years for plant construction (years 1 and 2) plus 6 years for operation (years 3 through 8). The building would cost $8 million and have a 31.5-year life for tax purposes. A$4 million payment would be due to the building contractor at the end of each year of construction. Manufacturing equipment, with a cost of $10 million and a 7-year life for tax purposes, is to be installed and paid for at the end of the second year of construction, just before the beginning of operations. The project also requires a working capital investment equal to 12 percent of estimated sales during the coming year. The initial working capital investment is to be made at the end of year 2 and is increased at the end of each subsequent period by 12 percent of the expected increase in the following year's sales. After completion of the project's 6-year operating period, the land is expected to have a market value of $1.7 million; the building, a value of $1 million; and the equipment, a value of $2 million. The production department has estimated that variable manufacturing costs would total 65 percent of dollar sales and that fixed overhead costs, excluding depreciation, would be $8 million for the first year of operations. Sales prices and fixed overhead costs, other than depreciation, are projected to increase with inflation, which is expected to average 6 percent per year over the 6-year production period. ABC Company's marginal tax rate is 40 percent, and its cost of capital is 15 percent. The company's policy is to assume that cash flows occur at the end of each year. Because the plant would begin operations at the start of year 3, the first operating cash flows would be realized at the end of year 3. As one of the company's financial analysts, you have been assigned the task of supervising the capital project analysis. Required: 1. Determine the initial investment required by the company 2. Determine the net cash flows attributable to the project 3. Determine the payback period of the project. 4. Determine the average rate of return the project 5. Determine the discounted payback period of the project. 6. Compute the NPV of the project 7. Compute the benefit-cost ratio(BCR) of the project 8. Compute the IRR of the project 9. Summarize the preferences dictated by each measure, and indicate which project you would recommend, why