The first major decision Sabrina must make involves a new ventilation add$-$on filter technology that helps handling Fine Particulate Matter $($PM$2\mathrm{.}5)($and especially severe pollens in the region$)$ with near absolute perfection. In general, this is risky but can be very potentially rewarding.

Originally, the investment proposal is that Dusty$-$rid Inc $($the company with best expertise and experience in the region, but smaller in size and operation scale$)$ would sell to NAI all necessary equipment and know$-$how. The initial one$-$time cost of this route to NAI would be $$10$ million upfront. NAI will then be in full control of the sales and services to customers $($on this new PM$2\mathrm{.}5$ perfect filter technology$)$ afterwards. The potential benefits of this deal can be great if the new super$-$filter would become particularly popular among customers in the region. Elements for estimated items to calculate $($expected$)$ cash flows $($and thus NPV$)$ are given down below:

Original Proposal: $($all expected numbers are $$incremental$)$

$4$

Initial outlay $=$ $ $10$ million

Earnings Before Interest and Tax $($end of year $1)=$ $$1\mathrm{.}5$ million Corporate Tax rate $=28\%$

Depreciation & Amortization $=$ $ $1$ million

Change in Current Assets $=$ $$100,000$

Change in Current Liability $=$ $$70,000$

Salvage value $=$ NONE

Note: The projects$$ initial outlay will be incurred RIGHT IN THE BEGINNING OF the first year $($e$.$g$.$ t $=0).$ For lack of better information, Sabrina estimates that the actual first$-$year cash inflow $($e$.$g$.$ t $=1)$ from the project will continue for the entire ten$-$year life.

However, being concerned about uncertainty around this new investment,

Sabrina proposed another alternative to Dusty$-$rid that calls for a partnership $($co$-$investment$)$ with NAI. To mitigate the risk to NAI even further, Sabrina added to this alternate deal that Dusty$-$rid must provide NAI with an exit strategy. Specifically, after five years of the super$-$ filter project, NAI can choose to sell the part of the project that it owns to Dusty$-$rid at a fixed price. Sabrina then asked Dusty$-$rid management to name the price. In a few days, Dusty$-$ rid came back with the EXIT price as $$3$ million. Apparantly, the partnership alternative represents a smaller scale operation to NAI. Projected numbers based on this alternative itself are given as follows:

Alternative Proposal: $($all expected numbers are $$incremental$,$ and to NAI$)$

Initial outlay $=$ $ $7$ million

Earnings Before Interest and Tax $($end of year $1)=$ $ $1,100,000$ Corporate Tax rate $=28\%$

Depreciation & Amortization $=$ $ $700,000$

Change in Current Assets $=$ $$50,000$

Change in Current Liability $=$ $$35,000$

Salvage value $=$ NONE

Note: Same as the original proposal, the projects$$ initial outlay will be incurred RIGHT IN THE BEGINNING OF the first year $($e$.$g$.$ t $=0).$ For lack of better information, Sabrina estimates that the actual first$-$year cash inflow $($e$.$g$.$ t $=1)$ from the project will continue for the entire ten$-$year life.

Other relevant pieces of information are given as follows:

$-$ The discount rate that reflects the riskiness in air$-$conditioning industry is $9\%$

$-$ The New Zealand $10$ Year Government Bond yield is $4\mathrm{.}38\%$

$-$ The variance of share returns on renovation industry in New Zealand is $36\%$

$-$ The decay rate can be assumed as equal in each year throughout the life of the project $-$ Let$$s use e $=2\mathrm{.}71828$

With the uses of Excel $($Sabrina will later need to use those Excel files to adjust numbers herself just in case$),$ calculate the worth of each alternative accordingly.

$(12$ Marks$)$

Write a two$-$page $($maximum $3$ pages$)$ Executive Summary to Sabrina to advise which alternative should be pursued by NAI. In the process, make use of numbers you calculated from Question $1$ for justifications. Also provide the points to be cautious about in your analysis.