I. Case:

Metropolitan Co$.($MC$)$ is considering adding a new product line to its portfolio. MC has already paid $$15,000$ for a location feasibility study that recommended install the new plant within the current unused space in MC$\text{'}$s main facilities.

The machinery will have an invoice price of $$600,000$ but it requires another $$60,000$ to be installed. The machinery has an economic expected life of $4$ years but for depreciation purposes it will fall in the MACRS $3-$year class. An expected $$50,000$ salvage value has to be recognized.

The new product line would generate incremental sales of $2,000$ units per year for the next $4$ years with an incremental cost of $$180$ per unit in the first year, excluding depreciation, and can be sold for $$340.$ The sales price and costs are expected to increase by $3\%$ per year due to inflation. To manage the new operation the MC$\text{'}$s net operating working capital would have to increase by an amount equal to $10\%$ of sales revenues. Firm's tax rate is $35\%$ and its overall weighted average cost of capital is $12\%.$

Determine:

a$.$ MC$\text{'}$s depreciation basis and annual depreciation expenses.

b$.$ Annual sales revenues and costs $($other than depreciation$)$

c$.$ Required net operating working capital

d$.$ After$-$tax salvage cash flow.

Calculate the net Cash Flow for each year and determine

a$.$ NPV

b$.$ IRR

c$.$ MIRR

d$.$ Discounted Pay$-$back period.

Provide analysis for the indicators suggesting that the new product line should be undertaken.

Perform a sensitivity analysis on the unit sales, costs $($other than depreciation$),$ and cost of capital. Assume that each of these variables can vary from its base case by $+$ or $-10,20,$ and $30\%.$ Include a Sensitivity diagram and discuss the results.

Even base case estimation is considered reliable; MC$\text{'}$s management is assessing a $25\%$ chance of better than expected product acceptance and a $25\%$ chance of worse than expected product acceptance. A poor acceptance will imply a reduction of $30\%$ in sales at a reduced unit price of $$330$; a strong consumer response will increase sales by $25\%$ with a unit price of $$360.$

a$.$ Determine expected NPV$,$ standard deviation and coefficient of variation of this project.

b$.$ MC$\text{'}$s average project has a coefficient of variation in the range of $0\mathrm{.}3$ to $0\mathrm{.}6.$ What would be your analysis and recommendations for this project?