ELZ Ltd. manufactures electronic components. Recently, researchers have identified a new process for manufacturing higher quality, more environmentally friendly components. Because the new process is innovative, the product development and design phase will be extensive. However, the new components will not require special handling at the end of their useful life. The accountants have estimated four years of information for the product as follows:

ELZ pays an income tax rate of 25% and has income from other products to offset any initial losses. The project has a required rate of return of 10%.

Required:

A. Determine the net present value (NPV) of the cash flows of the project over the estimated four years of its life cycle.?

B. In performing sensitivity analysis, which factors would you vary? Explain.

C. Would you recommend that ELZ undertake the project? Explain.