Hoosier Craft, Inc. is a producer of all-purpose fishing boats.

Hoosier Craft, Inc. is a producer of all-purpose fishing boats. Its current line of fishing boats areselling excellently. However, in order to cope with the foreseeable competition with other similarfishing boats, HC spent $4,500,000 to develop a new line of deluxe fishing boats with a deeperangledhull and higher sides. The model has a more power-efficient tiller on its gasoline outboardmotor as well as an electric trolling motor located at the bow besides the outboard. This newtrolling motor makes it much more easily and quickly to go from place to place. Moreover, thenew model has a built-in top of the line fishfinder GPS combo and a heavy duty bimini top. Thecompany had also spent a further $1,200,000 to study the marketability of this new line of fishingboats.HC is able to produce the new fishing boats at a variable cost of $22,500 each. The total fixedcosts for the operation are expected to be $5,000,000 per year. HC expects to sell 30,000 boats,32,000 boats, 18,000 boats, 14,500 boats and 11,000 boats of the new model per year over the nextfive years respectively. The new fishing boats will be selling at a price of $28,500 each. To launchthis new line of production, HC needs to invest $55,000,000 in equipment which will bedepreciated on a seven-year MACRS schedule. The value of the used equipment is expected to beworth $3,500,000 as at the end of the 5 year project life.HC is planning to stop producing the existing fishing boat model entirely in two years. Should HCnot introduce the new fishing boat model, sales per year of the existing fishing boats will be 19,000boats and 13,500 boats for the next two years respectively. The existing fishing boat model can beproduced at variable costs of $19,600 each and total fixed costs of $4,000,000 per year. Theexisting fishing boats are selling for $23,200 each. If HC produces the new fishing boats, sales ofexisting fishing boats will be eroded by 6,000 boats for next year and 4,500 boats for the year afternext. In addition, to promote sales of the existing fishing boats alongside with the new fishingboats, HC has to reduce the price of the existing fishing boats to $19,600 each. Net working capitalfor the new fishing boat project will be 25 percent of sales and will vary with the occurrence ofthe cash flows. As such, there will be no initial NWC required. The first change in NWC isexpected to occur in year 1 according to the sales of the year. HC is currently in the tax bracket of35 percent and it requires a 16 percent returns on all of its projects.You have just been hired by HC as a financial consultant to advise them on this new fishing boatproject. You are expected to provide answers to the following questions to their management bytheir next meeting which is scheduled sometime next month.

1. What is/are the sunk cost(s) for this new fishing boat project? Briefly explain. You have totell what sunk cost is and the amount of the total sunk cost(s). In addition, you have toadvise HC on how to handle such cost(s). (20 points)

2. What are the cash flows of the project for each year? (100 points)

3. What is the payback period of the project? Should it be accepted ifHC requires a payback of 4 years for all projects? (10 points)

4. What is the PI (profitability index) of the project? (10 points)

5. What is the IRR (internal rate of return) of the project? (10 points)

6. What is the NPV (net present value) of the project? (10 points)

7. Should the project be accepted based on PI, IRR and NPV? Briefly explain. (10 points)