Wacky Widgets, Incorporated is considering a new three$-$year expansion project to make new

Widgets. It requires an initial fixed investment of $$2\mathrm{.}7$ million. The fixed asset will be depreciated

straight$-$line to zero over its three$-$year tax life, after which it will be sold for $$50,000$ to a

scrapyard. The fixed asset will take $2$ years to install, so revenue will begin in year $2.$

The project is estimated to generate $$2,800,000$ in annual sales, with variable costs of $40$ percent.

There are no fixed costs, and working capital requirements are $5\%$ of annual revenues. The tax rate

is $35$ percent and the required rate of return is $15$ percent. The risk$-$free rate is $9$ percent. Your firm

requires a payback period of $3$ years to approve a project.

The Widget produced by this product will often go to the same customers as the Bidget, another

product produced by Wacky Widgets. They will often be shipped in the same package as another

product the firm produces. It will not reduce the overhead on producing Widgets, but it will reduce

the cost of shipping Bidgets by $$20,000$ per year in years $2-4.$

$1.$ Construct a full pro$-$forma statement for this project$$s projected incremental cash flows. Note

that this must be in the same format as we discussed for pro forma statements in class $($this is

worth $4$ points$)$

$1$ point each:

$2.$ What is the payback period? Based on this decision rule, should you do the project?

$3.$ What is the discounted payback period? Based on this decision rule, should you do the project?

$4.$ What is the NPV$?$ Based on this decision rule, should you do the project?

$5.$ What is the IRR? Based on this decision rule, should you do the project?

$6.$ What is the profitability index? Based on this decision rule, should you do the project?

$7.$ Should you approve the project? What decision rule are you using to make your final decision?