Chene Inc. has just developed a new drill. The new product is expected to produce annual revenues of $1,350,000. To produce the drill requires an investment in new equipment costing $1,440,000 and with a projected life cycle of five years. After five years, the equipment can be sold for $180,000. Working capital is also expected to increase by $180,000, which Chene will recover by the end of the new product's life cycle. Annual cash operating expenses are estimated at $810,000. The required rate of return is 8 percent.
Required:
1. Prepare a schedule of the projected annual cash flows.
2. Calculate the NPV using only discount factors from Exhibit 14A.1.
3. Calculate the NPV using discount factors from both Exhibit 14A.1 and 14A.2.