Problem 2 (covering chapter 6): The Company A is thinking of a new project that is expected to have following income statement projections for next 3 years (year 1, 2 and 3 is same).

• In year 0 the project requires an initial investment of $90,000, which will be depreciated using straight line depreciation to $0 over 3 years.
• Assume working capital changes of 0.
• Assume after-tax salvage value of $35,000.
• Tax rate is 34%.

1. What would be the Net Cash Flow (NCF) for each year (year 0, 1, 2, and 3)? (hint: calculate Operating Cash Flow (OCF) first, it will be same for year 1, 2 and 3).

2. What is the NPV of these Net Cash Flows at discount rate of 8%? Should you accept this project?

Sales (50,000 units at $4.00/unit)	$200,000
Variable Costs ($2.50/unit)	125,000
Fixed Costs	12,000
Depreciation ($90,000 / 3)	30,000
EBIT	$33,000
Taxes (34%)	11,220
Net Income	$21,780