Using the estimates below, please answer the questions that follow. I need to check my work. Thanks so much!

Ma & Pa Incorporated Expense Estimates (FIN_300)

Please note: The data below is based on Andre's original request of examination of an eight year project. You will use these numbers to answer a. thru e. on the Ma & Pa Worksheet.

I. Up-front costs: Andre Russell worked with the top management (Bill, Lucy, Lilian, and Hillary) as well as selected middle manager to arrive at the up-front costs. Based on his discussions with them, he is anticipating the up-front costs to be comprised of the following:

Total projected up-front costs: $2,200,000

Total projected cost of capital: $195,000

III. Sales: After working with Elizabeth Brown, Director of Sales and Marketing, and several other managers in her area, Andre is projecting the following sales for the first year. Further, these sales are expected to grow at 10% compounded for the duration of the project.

Total projected sales: $925,000

IV. Cash expenses: Based on the past expenses and projections for future expenses, Andre arrived at the following expenses on an annual basis. For simplicity, Andre assumed that these expenses will grow at 2% annually for the duration of the project.

Total projected cash expense: $310,000

V. Total projected depreciation: $250,000

Questions:

Use the eight year model, along with Andre's estimates for questions a. thru e.

a. At the end of the project, what is Ma & Pa Incorporated's earnings before taxes? Also, at the current tax rate of 35% for Ma & Pa incorporated, what is Ma & Pa Incorporated's net income?

b. Compute the project's after-tax cash flow. Operating cash flow = (Sales - Costs - Depreciation) (1 - t) + Depreciation - change in net working capital

c. Compute and interpret the project's NPV, IRR, and profitability index.

d. According to your above calculations: What is your interpretation on if the project should be accepted or rejected?

e. The minimum required rate of return is a weighted average of the firm's costs of various sources of capital. Explain.

f. Ma & Pa Incorporated realize that the project depreciation needs to be $290,000 and the project needs to last 10 years. The depreciation is now computed as follows:

- Land value depreciation: 80,000

- Building value depreciation: 75,000

- Equipment depreciation: 70,000

- IT infrastructure depreciation 65,000

Please compute the new NPV, IRR, and profitability index using the new numbers above.

g. Assume that they reduced the expenses, but depreciation increased to 350,000 and the project duration decreased to 6 years.

- Land value depreciation: 100,000

- Building value depreciation: 90,000

- Equipment depreciation: 85,000

- IT infrastructure depreciation 75,000

Please compute the new NPV, IRR, and profitability index using the new numbers above.

h. Regarding the firm's decision strategies: Between the original eight year scenario, and the scenarios from f and g (six and 10 year scenarios) - identify which is the best scenario. Please justify your choice using IRR, NPV and PI.