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The Sunshine Corporation is considering investing in a new widget manufacturing machine. The cost of the machine is $40,000, and the company anticipates the machine to be depreciated over five years to a residual value of $0. The widget manufacturing machine will result in sales of 3000 widgets per year. The price per widget that Sunshine Co. will charge its customers is $18, and is to remain constant. The widgets have a cost per unit to manufacture of $10. In the meanwhile, Sunshine Co. expects the new widget will cannibalise demand for some of the existing products at an amount of $3000 per year. At the end of four years, Sunshine Co. expects demand to fall to zero, due to anticipated advances in widget production technology. At that point, production will cease and Sunshine Co. expects to be able to sell the machine for $9000. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sunshine Co. needs to hold 2% of its annual sales in cash, 5% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 4% of its annual sales in accounts payable. Net working capital needed must be available from the beginning of the project, but will no longer be needed once the widget machine is sold. The firm is in the 30% tax bracket. The cost of capital is 12%.

(a) Estimate the after-tax cash flows for the project. To do this, you must present two tables. Table 1 should show the inputs of the accounting flows to determine the aftertax income. Table 2 should show the inputs to determine the after-tax cash flows. IMPORTANT: You must show each input in your table as a separate row. DO NOT group inputs together.

(b) Using NPV analysis, should Sunshine Co. go ahead with the project? Show all your working.

(c) What is the payback period of this new project? If Sunshine Co. has a payback cut-off of 3 years, should they accept or reject the project?

(d) Now, assume you will take the project, and then you find out that you also need to buy a piece of equipment for office use. This equipment costs $20,000. The maintenance costs for each year are shown in the table below together with the salvage value of the machine if it is sold in each year. You are trying to decide on the optimal time to replace this equipment. Even though your project lasts only for four years, you expect this piece of equipment can still be useful even after your project has completed. Therefore, you would like to evaluate this machine separately from your project. Assume it will be replaced continuously for the foreseeable future. You have decided to keep the equipment for at least 3 years but are uncertain whether a 3- or 4-year replacement period is most appropriate. The discount rate is 12% p.a. Ignore taxes.

year	0	1	2	3	4
initial cost	-20000
maintenance cost		-1000	-2000	-3800	-3700
salvage value(if sold)		17000	15000	13000	11900

Determine the best replacement period (consider only 3 or 4 years). Use either the perpetuity method or the AEC method.

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