Answer parts a through e regarding the following investment project.

Ms. Phy Nance, a project analyst at DROF Motor Co., would like her project included in next years capital budget. According to her report, the new equipment would cost $185,217 and its projected cash flows would be as follows:

Year 140,000

Year 250,000

Year 353,000

Year 453,000

Year 570,000

The cost of capital is 12%

a) What is the NPV calculated by the analyst? If her numbers are correct should you accept the project?

b) Assume that the analyst included shipping and set-up costs of $5,217 in her estimation of the cost of the initial investment. Is this procedure correct? Why?

c) Assume that no consideration was given to the fact that the floor space used for this project could have been rented each year for $9,000 per year. How would this affect the calculation?

d) Included in her analysis, Ms. Nance calculated that lighting, heating and air conditioning cost the company $7,500 per year and that the new equipment occupies 40% of the total floor space --so she deducted $3,000 per year from the cash flows to reflect overhead costs for the new equipment. Is this deduction correct or should it be reversed?

e) Given your answers to b, c, and d, what is your calculation of Net Present Value for this project and would you include it in next years capital budget?