WUESLIUI & dpildl buuyeunly driu vwwALL (U TT1dIRS) Online reselling business has experienced rapid growth in recent years. ABC is a company that sells refurbished electronic goods online. It purchases used iphones and laptops, cleans them and conducts technical checks before selling them as refurbished goods. The company is considering an expansion project to take advantage of the currently high demand for refurbished goods. It has paid a consultant $100,000 to provide a forecast on market demand over the next three years. The data analytic results by the consultant confirm that market demand for refurbished goods will stay strong in the near future. The expansion project requires an investment of $3 million in new equipment, which is depreciated based on straight line method to zero residual value over 3 years. At the end of the project life (year 3), the equipment can be sold for 30% of its initial cost. The tax rate for the company is 30%. The product revenues from the project are expected to be $2.5 million per year. The cost of goods sold is projected to be $900,000 per year. The selling, general and administrative expenses are $300,000 per year. In addition, an office will be required by the project and the CEO suggests that a currently vacant building owned by the company can be used. The building is quite decent as indicated by its rental rate of $200,000 per year. In years 1 to 3, the inventory of the project is $400,000, account receivables are 20% of the project revenues, and account payables are 10% of the project's cost of goods sold. Assume that the project requires no cash and the full value of the change in working capital due to the project will be recovered one year after the project ends, i.e., in year 4. The company has a target debt to equity ratio of 1.5, a cost of equity of 10% and a cost of debt of 5%. a. Calculate: [7 marks] i. the cash flow from investment activity for the project [2 marks] ii. the cash flow from operating activity for the project [2 marks] iii. the cash flow from working capital for the project [2 marks] iv. the total cash flow from the project [1 mark] b. What is the payback period of the project? [2 marks] c. What are the advantages and disadvantages of payback period method compared to the NPV rule? [2 marks] d. What are the shortcomings of the NPV rule? [1 mark] e. Calculate the weighted average cost of capital of company ABC? [2 marks] f. Check that the NPV of the project is $258,055. Show your working. [2 marks] g. The company usually uses a server that lasts 3 years, which costs $10,000 to purchase and $500 per year to maintain. A new server model has been introduced in the market that lasts 4 years, costs $15,000 to purchase but has no maintenance cost. The risk-free rate is 4% per year. Should the company use the traditional server or the new server model? Show your working. [4 marks]