Question: InfoSoft, a private software firm, is considering a new 3-year project - an online software store to sell its software directly to the public. The
InfoSoft, a private software firm, is considering a new 3-year project - an online software store to sell its software directly to the public. The initial investment in gross capital expenditure (GCE) is needed to start the project will be Rs 600, and it would remain at the same level for the whole life of the project. These investments are expected to have a life of 3 years with no residual and thus an annual depreciation expense of 200. It is expected that at the end 3rd year, the GCE would be sold for Rs 100. The initial investment in net operating working capital (NOWC) of Rs 200 is required to start the operations, and in year 1 and 2, it will be 20% of the revenues, recovering in year 3 at cost. The first year's revenues are expected to be Rs 1000, growing 10% in year 2 and 5% in year 3. All operating expenses, excluding depreciation, are expected to be 20% of revenues for all years. The marginal tax rate is 40%. All amounts are in million. Required: Calculate the expected free cash flows of the project? Also, evaluate the project via Net Present Value (NPV) and Payback Period techniques, given that the cost of capital is 10%
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