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1. Capital budgeting The company is going to analyse a new investment project, which has the following characteristics: Unit price $5.00 Annual unit sales 40,000

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1. Capital budgeting The company is going to analyse a new investment project, which has the following characteristics: Unit price $5.00 Annual unit sales 40,000 Variable cost per unit $2.5 Investment into new machinery (t=0) $400,000 Investment in working capital $50,000 (fully recovered at the end of project) Project life 6 years Annual depreciation $60,000 Market value of machinery (t=6) 80,000 Tax rate 40 % (the same for profits and capital gains) Required rate of return (WACC) 10% Marketing research expense $16,000 (the research was done earlier this year) Questions: a) Find the project cash flows (incl. initial investment, operating cash flows each year and terminal cash flow) b) Evaluate the project NPV c) Should the company invest into such project? Explain

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