$1.$ A proposed project requires an initial investment in fixed asset of $$3,000,000$ and is depreciated straight$-$line to zero over its $3-$year life. The project is expected to generate sales of $$4,000,000$ per year. It has annual fixed costs of $$1,000,000$ and annual variable costs of $$1,500,000.$ The required rate of return on the project is $13$ percent. The relevant tax rate is $25$ percent. At the end of the project $($i$.$e$.,$ year $3)$ the asset can be sold for $$600,000$ before taxes $($i$.$e$.,$ before$-$tax salvage value or resale value$).$ In addition, the project requires a net working capital of $$250,000$ at the beginning of the project and will be recouped at the end of the project. The project only depreciates the $$3,000,000$ initial cost. The salvage value is excluded from depreciation.

a$)$ Compute the annual operating cash flow $($OCF$)$ of the project and the after$-$tax salvage value at the end of the project in year $3.$ Note that when we compute the after$-$tax salvage value for this part, the book value at the end of year $3$ is zero because the asset is fully depreciated straight line to zero over $3$ years.

b$)$ Calculate the project$$s net present value $($NPV$).$ Should the project be accepted?

c$)$ Now assume that the firm uses $3-$year modified accelerated cost recovery system $($MACRS$)$ method to depreciate the $$3,000,000$ initial cost of the fixed asset. The three$-$year MACRS table is provided below.

i$)$ Find the depreciation for year $1,$ year $2$ and year $3$ of the project.

ii$)$ Find the book value of the fixed asset at the end of year $3.$

iii$)$ Compute the after$-$tax salvage value $($or resale value$)$ at the end of the project $($year $3).$ Note that for the part, we have to use the remaining book value in year $3$ from $($ii$)$ above to find the after$-$tax salvage value.

iv$)$ Compute the operating cash flow $($OCF$)$ for year $1,$ year $2,$ and year $3$ of the project. Use the depreciation for each year from $($i$)$ to calculate the OCF for the year.

v$)$ Calculate the new net present value $($NPV$)$ of the project. $133\mathrm{.}33\%$

$244\mathrm{.}44\%$

$314\mathrm{.}82\%$

$47\mathrm{.}41\%$