How do I solve this first task? Evergreen Inc. was formed in $2014$ as a company specialized in producing baby skin$-$care products. Their dermatologist$-$developed skin$-$care products gained popularity and trust, and the company was able to considerably grow its market share over the past $10$ years. Stephen Davies, the Finance Director of Evergreen company, has currently five tasks on his table and he needs to present his recommendations in the upcoming board meeting next week.

The first task is to analyse the feasibility of replacing one of the main old production lines with a new one of a more advanced technology. This is the production line of its most popular skin$-$care products, and accordingly the operation department is recommending this project as they expect the new technology will have a considerable positive impact on productivity and accordingly on sales. The new production line will cost $\backslash (\backslash$$ $5\backslash$mathrm$\{$M$\}\backslash )$ and is expected to have a salvage value in $6$ years for $\backslash (\backslash$$ $750\backslash$mathrm$\{$~K$\}\backslash ).$ The existing production line was bought $2$ years ago for $\backslash (\backslash$$ $2\backslash$mathrm$\{$M$\}\backslash ),$ and can be sold today at a market value of $\backslash (\backslash$$ $600\backslash$mathrm$\{$~K$\}\backslash ).$ If not sold now, this old machinery is expected to have a salvage value of $\backslash (\backslash$$ $100\backslash$mathrm$\{$~K$\}\backslash )$ in $6$ years. The new production line is expected to generate sales in year $1$ for $\backslash (\backslash$$ $4\mathrm{.}2\backslash$mathrm$\{$M$\}\backslash )$ and thereafter sales are forecasted to grow by $\backslash (4\backslash \%\backslash )$ a year for the coming $6$ years. This is as opposed to the current production line which was expected to generate $\backslash (\backslash$$ $2\mathrm{.}5\backslash$mathrm$\{$M$\}\backslash )$ of sales next year and grows by $\backslash (2\backslash \%\backslash )$ for the coming $6$ years. Manufacturing costs are the same under both production lines. The new production line requires an initial investment in working capital of $\backslash$$$300$k$.$ Thereafter, working capital is forecasted to grow at the same growth rate of revenues of $\backslash (4\backslash \%\backslash ).$ CCA rate is $\backslash (20\backslash \%\backslash ).$

The second task is to prepare the proforma financial statements for the year $2025$ and determine the External Financing Needed $($EFN$).$ The percentage of sales method would be used, and two scenarios need to be analysed:

$-\backslash (\backslash$underline$\{1\}^\{\backslash$text $\{$st $\}\}\backslash )$ scenario: the company will go ahead with the replacement of the old production, and accordingly the assumptions regarding the change in sales as well as the Property Plant and Equipment $($PPE$)$ would reflect this replacement decision $($that is$,$ the increase in sales would be equal to the change in sales because of the new production line, and the increase in PPE would also reflect the change in PPE associated with this replacement$).$ Also, the initial increase in working capital would be reflected in the inventory account $($so that the inventory will grow by the same growth rate of sale in addition to an amount equal to the initial increase in working capital required for the replacement project$).$

$-\backslash (\backslash$underline$\{2\}^\{\backslash$text $\{$nd $\}\}\backslash )$ scenario: the company will not go ahead with the replacement of the old production line. And in that case, it will be assumed that the sales growth rate would be equal to the maximum growth rate a firm can achieve with no external equity while it maintains the current debt$-$equity ratio. And considering that the company is operating at a full capacity.

In both scenarios, the "External Financing Needed" $($EFN$)$ calculated will be added to the LongTerm Debt, and necessary adjustments will be done to make the balance sheet balances. And if there is a surplus instead, it will be added to the cash balance. Also note that:

$-$ The unlevered cost of capital $($in an all$-$equity scenario$)\backslash (=17\backslash \%\backslash ),($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 $\backslash (2024=7\backslash \%\backslash )$

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

$-$ The tax rate $\backslash (=40\backslash \%\backslash )$

$-$ Dividend pay$-$out ratio in $\backslash (2024=60\backslash \%\backslash )$

Questions:

Put yourself in Stephen David's shoes, and attempt accomplishing all five tasks, as follows:

For the first task:

a$)$ Calculate the NPV $\backslash$& 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.

For the second task:

a$)$ Prepare the proforma financial statements for the year $2025$ under the two scenarios mentioned in the second task and calculate the EFN $($or surplus$).$

P$.$s$.$ Prepare the proforma financial statements for the two scenarios even if you have concluded that the replacement decision is not feasible

b$)$ Add the EFN to the Long$-$Term Debt $($or add the surplus to the cash balance in case a surplus$),$ use the same current Dividend Payout ratio in your projections, and make the balance sheet balances.

In the third task,

a$)$ Calculate the percentage of debt under the first scenario in task $2($total liabilities $/$ total assets$)$ and determine if it exceeds $55\backslash \%.$

b$)$ If it exceeds $55\backslash \%,$ make a different suggestion for covering the EFN so that to abide by the maximu