For the following problems, unless stated otherwise, you may assume that the cost of land, L, and the salvage value, S, of the plant are both zero.

The following expenses and revenues have been estimated for a new project:

Revenues from sales = $4.1 × 10⁶/y

Cost of manufacturing (excluding depreciation) = $1.9 × 10⁶/y

Taxation rate = 40%

Fixed capital investment = $7.7 × 10⁶

(two payments of $5 × 10⁶ and $2.7 × 10⁶ at the end of years 1 and 2, respectively) Startup at the end of year 2

Working capital = $2 × 10⁶ at the end of year 2

Land cost = $0.8 × 10⁶ at the beginning of the project (time = 0)

Project life (for economic evaluation) = 10 y after startup

For this project, estimate the NPV of the project assuming an after-tax internal hurdle rate of 11% p.a., using the following depreciation schedules:

MACRS method for 5 years

Straight-line depreciation with an equipment life (for depreciation) of 9.5 years

Comment on the effect of discounting on the overall profitability of large capital projects.