1. ONE, Inc. is considering a new project that is expected to generate $120 million in sales each year of the 6 year life of the project. They estimate variable costs to be 50% of revenues and fixed costs of production to be $5 million per year. The project requires an initial investment of $200 million in new machinery that will be depreciated on a straight-line to zero over the life of the project. After the project is done, the machinery will be scrapped at no cost. Assume ONE, Inc. has a marginal tax rate of 35% and the project has a WACC of 8%.

(a) Find the NPV of the project. Should ONE, Inc. invest? [10 points]

(b) What is the break-even level of annual revenues (that sets NPV = 0)? [5 points]

(c) After submitting your proposed valuation to management, your boss noted that the project is going to tie up some capital so the NPV may be overstated. In particular, she notes that 1) company policy is to allow customers to pay with a 3 month lag, 2) the project will require an increase in inventory equal to 25% of sales, and 3) the project will require an initial increase in cash of $20 million that will be returned once the project is completed. Find the new NPV. Should ONE, Inc. invest?