Do not round intermediate calculations. Final dollar answers should be rounded to two decimal places. Final interest rate answers should be rounded to 4 decimal places as a percent. Show all your work.

Klaatu Co. Has recently completed a $400,000, two-year marketing study.

Based on the results, Kaatu has estimated that 3,500 of its new RUR-class robots could be sold annually over the next five years to yield net incremental pre-tax revenues of $6,000 each. The companys financial director also believes that net pre-tax revenues of the companys current RTR- class robots will be reduced by $5,000,000 annually for each of the five years of the project. Assume that these cash flows occur at the end of each year.

Start-up costs include $40 million to build production facilities, $2.4 million to acquire land, and fully tax-deductible expenses of $1.4 million (assume the tax deduction can be taken immediately). $8 million in net working capital. The $40 million facility is made up of a building valued at $5 million that will be depreciated using the 20-year depreciation schedule for which the rates of depreciation for first 5 years are: 3.750%, 7.219%, 6.677%, 6.177%, and 5.713% (as found in IRS Publication 946) and $35 million of manufacturing equipment using the 7-year schedule found on the MACRS table (distributed in class). At the end of the projects life, the facilities (including the land) will be sold for an estimated $8.4 million, assuming the buildings value will be $4 million. The value of the land is not expected to change. Net working capital requirements for the project are estimated as follows: Year 0 an immediate increase of $8,000,000; Year 1 a further increase to $10,000,000; Years 2 7 remaining at $10,000,000; Year 8 a return to pre-project levels.

An ongoing, profitable business, Klaatu pays taxes at a 40-percent rate. Klaatu uses NPV analysis at a 10-percent discount rate on projects such as this one. Should Klaatu produce the RUR-class robots? Show all your work.