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The sales and finance team of a car company is evaluating anew proposed luxury model of its brand that will require aninvestment of $1Billion in a new machine for car interiordecoration. Demand for the company’s car is expected to begin at100,000 units in year 1, with 10% annual growth thereafter.Production cost will be $40,000 per unit in the first year, andincrease by a rateof either 3% or 5% per year as a result of wageincrease. Selling price will start at $35,000 and increase by 5% ofthe production cost. The model will be phased out at the end ofyear 10. In addition, 0.3%, 2% and 1% of before tax profit per yearwill be spent on social corporate responsibility, commercial(including promotions) and recalls respectively. Assume taxes willbe 30% of yearly profit and that inflation will remain at 0% peryear throughout the 10 year of production. Also assume interestrate is expected to be 3% per year in the first 5 years and 5% inthe last 5 years.

a. Based on present worth analysis, is the proposed investmentprofitable if production cost increases by a rate of 3% per year asa result of wage increase? Justify your answer.

b. Based on present worth analysis, is the proposed investmentprofitable if production cost increases by a rate of 5% per year asa result of wage increase? Justify your answer.