1. (13 pts.) Dave Alvin, the CFO of Blasters Powertrain Products(BPP) has requested your assistance in evaluating a capitalbudgeting proposal. The proposal involves the production of a newline of gearboxes for use in heavy freight applications. Researchand development costs to develop this new line of gearboxes were$570,000 last year (2018). Production of the new product wouldrequire investment in (i.e., the purchase of) new machinery at acost of $6.6 million, with a useful life of 4 years. BPP hasconferred with its tax accountant and has been informed that theymust depreciate the machinery under the MACRs 5-year class. (Seepage 4 for a MACRS depreciation schedule.) Forecasts indicate thatthe machinery can be sold for a market value of $270,480 at the endof the 4-year period. Management expects sales to be $7.65 millionin year 1, and sales are projected to increase by 6%/year over thelife of the project. Variable production costs are projected to be$5.85 million in year 1 and management expects these costs toincrease by 2%/year over the life of the project. Fixed productioncosts for the gearboxes are expected to be $165,000 each year. IfBPP produces the new line of gearboxes, BPP will need to makeadditional investments in Net Working Capital (NWC) to support theincreased operations. In particular, NWC (entering any year) isexpected to be 10% of the projected sales for that year. That is,the NWC balance at t=0 would be 10% of the projected sales for year1, the NWC balance at t=1 would be 10% of the projected sales fort=2, and so on. The cumulative investments in NWC made as a resultof this project would be recovered in the project's final year. Inother words, the NWC balance will drop to $0 at t = 4. The discountrate (also called cost of capital) used to evaluate this projectwould be 9.06% (although this variable is not needed in thisproblem, given the instructions below), and the relevant tax rateis 25.00%.

Develop the incremental cash flow projections for this proposal.Your worksheet should resemble the numerous examples covered inLesson 6, including the terms relating to “operating” cash flows,?NWC, and net capital spending. Of course, any given column in yourworksheet should contain the total cash flow for that column.[Note: Normally, you would then use these cash flows to calculateNPV and IRR of the decision to start the new line of gearboxes or(2) do nothing. If NPV > 0 (and, equivalently, IRR > requiredreturn), then the firm will choose option 1. If NPV < 0 (and,equivalently, IRR < required return), then the firm will chooseoption 2. However, this assignment already contains an adequatenumber of other NPV and IRR calculations.] 2