Answer Happy

Question 4 (Total 15 marks) 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 networking 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 32% 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) cBased 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 Pl (profitability index) when the required rate of return is 12% (2 marks) e. Based on the pl rule, will you accept this project? Also write down the reason for your decision (1 mark)