A company is considering a new 3 year expansion project that requires an initial fixed asset investment of $4,500,000. The fixed asset will be fully depreciated straight line over 3 years. The new project will generate $2,600,000 in new annual sales with corresponding new variable expenses of $600,000 annually.

The project requires an initial investment in net working capital of $300,000. At the end of the 3 year period, the company will sell the fixed asset for $500,000. The company's policy is not to subtract the salvage value from the original fixed asset cost for depreciation purposes. The company's tax rate is 35% and its required rate of return for this project is 12%.

An extensive marketing and research study that cost the company $400,000 was completed 3 years ago and concluded that the project should not be pursued.

1) What is the annual cash flow in year 3?

2) Should the company make the investment?

a) No because the NPV is less than 0

b) Yes because the NPV is between $1 - $20,000

c) Yes because the NPV is between $20,000 - $40,000

d) Yes because the NPV is between $40,000 - $60,000

e) Yes because the NPV is between $60,000 - $80,000

f) Yes because the NPV is greater than $80,000

3) A firm is funded with $200 million in debt and $600 million in equity. The YTM on the firm's bonds is 10%. The tax rate is 30%. The firm has a beta of 1.25. The risk free rate is 2% and the market risk premium is 12%. The weighted average cost of capital for the firm is:

a) Less than 12%

b) Between 12% - 13%

c) Between 13% - 14%

d) Between 14% - 15%

e) Between 15% - 16%

Greater than 16%