Model Motor Company, Nassau, Bahamas is considering a new line to its product mix, and the capital budgeting analysis is being conducted by you. The new line would be set up in vacant space in their building. The equipment's is invoiced at $200,000, $10,000 in shipping charges, an additional $30,000 to install the line in Nassau. The equipment has an economic life of 4 years, and a salvage value of $25,000 after 4 years of use.

The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to 12% of sales revenues. The firm's tax rate is 40%, and its overall weighted average cost of capital is 10%. Assume the following depreciation expense: Y1 - $79,992; Y2 - $106,680; Y3 - $35,544; Y4 - $17,784

Construct annual incremental operating cash flow statements.

1. Assume the following depreciation

expense: Y1 - $79,992; Y2 - $106,680; Y3 - $35,544; Y4 - $17,784

Estimate the required net working capital for each year, and the cash flow due to investments in net working capital. (4)

8 Calculate the after-tax salvage cash flow.

Calculate the net cash flows for each year. Based on these cash flows, what are the project's NPV, IRR, discounted payback? Do these indicators suggest the project should be undertaken?