Palantir Technologies Inc. is considering a project to produce a new machine to replace the current machine. The initial

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Palantir Technologies Inc. is considering a project to produce a
new machine to replace the current machine. The initial investment
required for this new equipment will cost $2,000,000 in non-current
assets today, and will be depreciated on a straight-line basis over
a 4-year project period. Palantir expects that the equipment can be
sold for about 20% of its acquisition cost when the project is
finished. Palantir has spent about $150,000 for a marketing study
and about $450,000 on research and development for the new project.
As a result of the new equipment, current assets will increase by
$300,000 and the current liabilities will increase by $200,000. The
net working capital will be recovered at the end of the project.
The new machine is expected to generate the sales revenue of $3.5
million with variable cost of $800,000. At the same time, Palantir
expects that they will have reduced sales revenue of current
machine by $900,000 while saving the variable cost of $150,000.
Some other expenses including the fixed cost is $700,000. Palantir
currently has $5,000,000 of debt on the 3.2% of interest rate per
annum, and the company tax rate is 35%. Required: a. Please create
pro forma financial statements including the income statement and
projected total cash flow. (8 marks) b. Using the information
obtained in (a), please calculate the NPV of the project when the
required rate of return is 9%. (3 marks) c. Based on the NPV rule,
will you accept this project? Also write down the reason for your
decision. (1 mark) d. Using the information obtained in (a), please
calculate the PI (profitability index) when the required rate of
return is 12%. (2 marks) e. Based on the PI rule, will you accept
this project? Also write down the reason for your decision.