GAP, a retail chain, is considering buying a registered software from Microsoft so that

it can more effectively deal with its retail sales. The software costs $$750,000$ and will

be depreciated down to zero using the straight$-$line method over its five$-$year economic

life.

The marketing department predicts the sales will be $$600,000$ per year for the next

three years, after which the market will cease to exist. The cost of one unit sold and

operating expenses are predicted to be $25\%$ of sales. After three years the software

can be sold for $$400,000.$ The GAP also needs to add net working capital of $$25,000$

immediately and maintain it for the next two years. The corporate tax rate is $35\%.$

What is the NPV of the project? Should GAP undertake it$?$

Here is answer.

$($Unlevered$)$ net income: NI$0=0,$ NI$1=$ NI$2=$ NI$3=195$;

Free cash flows: CF$0=775,$ CF$1=345,$ CF$2=370,$ CF$3=710$

The NPV of the project is $233\mathrm{.}46.$ We should undertake it$.$ Tell me why.