Question 2 (10 marks) ParCol is looking to expand its product line leading to increased revenues...

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Question 2 (10 marks) ParCol is looking to expand its product line leading to increased revenues but will require a capital outlay to install the new production line. It is estimated that the project life associated with the new product line will be 10 years. Given the following data (all dollar values are in real dollars): New product line: o Production line equipment first cost (including installation): $400,000 o Production line equipment estimated salvage value after 10 years: $50,000 CCA rate for the equipment: 30% o Revenues from the new product line: $200,000 growing at 6% (real rate) for the first 4 years, then remaining steady (as of year 5) until the end of the project (i.e. 10 years) Gross margin estimated to be 35% of sales o Sales, general and administrative costs estimated to be 5% of sales Company specific: Current stock price: $42 o Company beta: 1.2 o Tax rate: 25% o Company is fully equity financed Market data: o Risk-free rate: 4% o Expected market return: 10% o Expected annual inflation: 2% a) Determine the appropriate interest rate to use for this analysis - indicate if the rate you calculated is actual or real and before or after tax. For the following questions, use a real MARR of 10% (after tax). All your calculations below should be on an after tax basis. b) Determine the actual MARR. c) Determine the present worth of the equipment. d) Determine the present worth associated with the operational cash-flows. e) Determine the present worth of the project and comment on its viability. f) Your sales team is not sure of the initial sales figure of $200,000. Determine the break- even initial sales value for this project (assuming the sales growth profile remains as presented above-i.e. growing at 6% per year for the first 4 years, then remaining steady for the remainder of the project). Question 2 (10 marks) ParCol is looking to expand its product line leading to increased revenues but will require a capital outlay to install the new production line. It is estimated that the project life associated with the new product line will be 10 years. Given the following data (all dollar values are in real dollars): New product line: o Production line equipment first cost (including installation): $400,000 o Production line equipment estimated salvage value after 10 years: $50,000 CCA rate for the equipment: 30% o Revenues from the new product line: $200,000 growing at 6% (real rate) for the first 4 years, then remaining steady (as of year 5) until the end of the project (i.e. 10 years) Gross margin estimated to be 35% of sales o Sales, general and administrative costs estimated to be 5% of sales Company specific: Current stock price: $42 o Company beta: 1.2 o Tax rate: 25% o Company is fully equity financed Market data: o Risk-free rate: 4% o Expected market return: 10% o Expected annual inflation: 2% a) Determine the appropriate interest rate to use for this analysis - indicate if the rate you calculated is actual or real and before or after tax. For the following questions, use a real MARR of 10% (after tax). All your calculations below should be on an after tax basis. b) Determine the actual MARR. c) Determine the present worth of the equipment. d) Determine the present worth associated with the operational cash-flows. e) Determine the present worth of the project and comment on its viability. f) Your sales team is not sure of the initial sales figure of $200,000. Determine the break- even initial sales value for this project (assuming the sales growth profile remains as presented above-i.e. growing at 6% per year for the first 4 years, then remaining steady for the remainder of the project).