introduce a new mahogany dining room table set. The set will sell

for $$5,900,$ including a set of eight chairs. The company feels that sales will be $1,800,$

$2,150,2,600,2,350,$ and $2,200$ sets per year for the next five years, respectively. Variable

costs will amount to $37$ percent of sales and fixed costs are $$2\mathrm{.}05$ million per year. The

new tables will require inventory amounting to $10$ percent of sales, produced and stockpiled

in the year prior to sales. It is believed that the addition of the new table will cause

a loss of $250$ tables per year of the oak tables the company produces. These tables sell

for $$4,300$ and have variable costs of $40$ percent of sales. The inventory for this oak

table is also $10$ percent of sales. The sales of the oak table will continue indefinitely.

J$.$ Smythe currently has excess production capacity. If the company buys the necessary

equipment today, it will cost $$16$ million. However, the excess production capacity means

the company can produce the new table without buying the new equipment. The company

controller has said that the current excess capacity will end in two years with

current production. This means that if the company uses the current excess capacity for

the new table, it will be forced to spend the $$16$ million in two years to accommodate

the increased sales of its current products. In five years, the new equipment will have a

market value of $$2\mathrm{.}9$ million if purchased today and $$4\mathrm{.}8$ million if purchased in two

years. The equipment is depreciated on a $7-$year MACRS schedule. The company has a

tax rate of $21$ percent and the required return for the project is $11$ percent.

a$.$ Should J$.$ Smythe undertake the new project?

b$.$ Can you perform an IRR analysis on this project? How many IRRs would you expect

to find?

c$.$ How would you interpret the profitability index?