QUESTION 2: Cherry Ltd. is considering a new project that produces a new smarter cleaning robot. If accepted, this project can generate sales of additional 5000 units each year starting in year 1. Each unit sells for 2990 dollars. The new project will require the company to incur incremental operating expenses, including hiring additional personnel and extra security, which are together equivalent to 60% of the incremental revenue every year. To invest in this new project, the company will need to purchase a new machine, which costs 10000000 dollars. The new machine will be fully depreciated to a value of zero on a straight-line basis over the 10-year life of the project. The new project will also require 1000000 dollars in additional working capital immediately. This working capital investment will be fully recovered in the last year of the project. The project will not require any other working capital investment during its 10-year life. To fund the new project, the company will have to borrow 3000000 dollars at 3% annual interest rate from the bank and will pay this additional annual interest payment of 90000 dollars starting from year 1. The company tax rate is 30%. The cost of capital is 12% per annum.

Answer the following questions 2(a) to 2(f). Note: For all the calculation questions, you are only allowed to write the numerical answer you calculated for the question, please DO NOT add $, %, dollars, million, thousand, percent, space, etc. in your answers.

2(a): Calculate the projects incremental free cash flows in year 0. (Note: If it is negative, please remember to add a negative sign.)

2(b): Calculate the projects incremental free cash flows each year from year 1 to year 9 (the cash flow is the same from Year 1 to Year 9).

2(c): Calculate the projects incremental free cash flows in year 10.

2(d): What is the payback period of this project (round to 2 decimal places if needed)?

2(e): Describe the steps to calculate NPV of this project. Is the NPV positive or negative? (You are not required to calculate the exact number for NPV. When describing the formula, please write a simplified version of formula in plain text, e.g. PV=CF/(1+r)^n) 2(f): Should the company accept the project based on NPV?