Masters Company currently produces cereal targeted to consumers over 40 years old.

Sales have
steadily declined over the last 10 years resulting in a decision to shut down the manufacturing plant. The
plant was built 40 years ago at a cost of $28,000,000 and is now fully depreciated. A rival cereal
company has offered to purchase the existing facility for $15,000,000 in its current condition.

The Vice President (VP) in charge of the plant has developed an alternative to closing the plant. The Vice
President has proposed using the existent plant to manufacture wheat flakes targeted to consumers
under 10 years of age. The VP estimates sales of wheat flakes to be 400,000 cases in the first year (2018)
and to escalate at 4% for years 2019 through year 2023. The sales price of wheat flakes will be $110 per
case in 2018 and will increase 4% annually thereafter. 1000 cases of wheat flakes can be produced from
one ton of wheat. In year one, the price of wheat (per ton) is estimated at $31,000. The price of wheat is
expected to increase 4% annually. For each ton of wheat, ton of sugar will be added. In year one the
price of sugar is estimated at $92,000 per ton and is expected to increase at 4% annually.

The plant will employ 70 workers costs would be $1 million at 2018, and would increase annually by 4%.
The plants production manager has determined the costs of retooling required to begin production.
New flake stamping equipment will cost $26,000,000. The new equipment and storage facilities will be
depreciated over 6 years using MACRS rates. The estimated market value of the equipment at the end of
the projects 6-year life is $5,000,000. The project would require initial net working capital of $5 million
and then 10% of annual sales. Masters company has a marginal tax rate of 34%. The firms existing
capital structure is considered optimal. Its cost of capital is 10% for average risk projects. Low risk
projects are evaluated with a WACC of 10%, and high- risk projects at 13%.

1. Use and Excel spreadsheet to determine the cash flows from the project.
2. Find the projects NPV, IRR and payback period.
3. Based on the information in the problem, would you recommend that the project be accepted?
4. Conduct a sensitivity analysis to determine the sensitivity of the NPV and IRR to changes in sales
price, units sold, and cost per unit. Set these variables values at 10% and 20% above and below
the base case.
5. Conduct a scenario analysis, assuming that equipment cost, variable cost, fixed costs, price and
unit sales projection are accurate within +-20.