Question 1 (45 marks) Norman Company has an opportunity to produce and sell a revolutionary new smoke detector for homes, and the project would expect to last for 6 years. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential: 1. New equipment would have to be acquired to produce the smoke detector. The equipment would cost $1.200.000 and be usable for 6 years. After 6 years, it would have a resale value at $120,000. Over the 6-year period, annual depreciation would be $180,000 2. Production and sales of the smoke detector would require a working capital investment of $240,000 to finance account receivable, inventories, and day-to-day cash needs. This working capital will be locked for the whole project duration, and would only be released for use elsewhere after 6 years. 3. An extensive marketing study projects sales in units over the next 6 years as follows: Year Sales in Units 8,000 12,000 14,000 4-6 18,000 4. The smoke detectors would sell for $120 each, and total variable costs would be $64 per unit. 5. The company is required to advertise heavily during the early years of sales. The advertising program follows: Year Annual advertising (5) 240,000 120,000 3.4 60,000 40,000 1 2 3 1 2 5-6 6. Annual fixed costs (excluding depreciation indicated in 1. above) for salaries, insurance etc would totaled S220,000 per year. S140,000 to do so. 7. The equipment would need a major repair at the end of year 3, and would cost 8. The company's required rate of return is 18%. 9. Income tax is ignored for the analysis. 5. Calculate the Modified Internal Rate of Return ("MIRR") for the project. (7 marks) 6. For this part, assuming all annual cash flows happen evenly over the years (for simplicity, assuming resale of equipment and release of working capital at the end of year 6 will also be happening evenly over year 6): a. Calculate the payback period for the smoke detector project (4 marks) b. Calculate the discounted payback period for the smoke detector project (6 marks)