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Details of AssignmentFINEHEALTH Inc. has spent $2 million in the last year in research and development (R&D) for anext generation energy drink for athletes. Although it costs $2 million in the first year’s R &D, itis predicted that achieving a target result in this research may take another 4 to 6 years’ time. Inthe meantime, despite huge controversy, the company is planning to introduce therevolutionary pre-version of this drink, called X-TRM, which might cause long-term healthhazards for some users due to unknown reasons. The General Manager (GM) of FINEHEALTHInc. is asking for a detail analysis on X-TRM project. If the project is initiated, it will require anannual expenditure on R&D of 2% of the above amount spent for R&D in the first year.After renovating one existing section of the factory, the production line for X-TRM can bestarted. The project is expected to run for six years when the target drug will be ready tointroduce. Required renovation can be conducted immediately at a cost of $220,000 thatincludes installation cost of new plant and equipment (P&E). The company has decided tocapitalise total renovation costs to new P&E. The company has decided to capitalise totalrenovation costs to new P&E. FIN20014_KAPLAN_Financial Management: Individual Assignment Study Period 2, 20162 | P a g eA local distributor of a German company can immediately supply all required parts andaccessories of the new P&E for a total charge of $3,400,000 including import duty of $330,000.In addition, for new P&E, transportation cost is estimated to be $80,000. Total costs for P&Ewould be depreciated using a tax allowable straight line rate of 15% per year. However, thecompany can sell P&E at the termination of the project for $400,000.It is also estimated that the new production line will require an initial increased investment of$57,000 in stock (inventories) and $39,000 in debtors (accounts receivables) that are offset byan increase in creditors (accounts payable) of $36,000.The procurement of HR will be one-off cost at the beginning and estimated to be $56,000. Theproject requires annual quality assurance inspection that will cost $40,000 per annum.It is projected that sale of X-TRM would be 56,000 cartons per year when variable operatingcost will be 45% of sales. Selling price per carton will be $50. Annual fixed operating cost,excluding depreciation, will be $450,000. Due to increasing demand, it is estimated that thesales will increase by 25% in the fourth year and that will remain the same in the last two years.For increased sales volume, variable operating cost would be 40% of sales.Existing section of the factory, where the new P&E will be installed, is in use by a subcontractorwho pays monthly rent of $6,000. This rent income for FINEHEALTH will discontinue once thenew production line X-TRM will commence its operation.The firm has a 13% weighted average cost of capital (WACC) and is subject to a 30% tax rate.The required discounted payback period is 4 years.The GM hesitates to take the final decision unless all issues are clearly explained. The GM alsoasks for a detail analysis of cash flows and explanations of results of capital budgeting methodsthat are usually used in evaluating projects.RequiredUsing Excel Spreadsheet prepare a full analysis to be presented to the GM of FINEHEALTH Inc.evaluating whether the X-TRM project should be started or not. Your analysis should include thefollowing• Table of cash flows• Use of excel formulae where appropriate (refer eLearning video of Week-6)• A written report (1200 words, +/- 10%) outlining your recommendation as to whetherFINEHEALTH INC should proceed. Justify your recommendation using quantitative andqualitative issues and your analysis of probable risks relating to the project.Marks will be awarded for:• Set out of spreadsheet (watch eLearning video of week-6)i. Ease of reading spreadsheetii. Use of excel formulae in organised spreadsheetiii. Correct application of theoretical model• Overall presentation of answer including the written report.* Carefully read the following Marking Rubric on page-4 for required components andpresentation of formal report

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• 1512892975-FIN20014_KAPLAN_Assignment_2016_SP2 with Guidelines2.pdf