A firm has a proposed 5-year project. If accepted today (t=0), the project is expected to generate positive net cash flows for each of the following five years(t=1 through t=5). A new machine will be put in service, and to implement this project, an old machine will be sold. Note the following items. The new machine costs $1,000,000. Shipping and installation will cost an additional $500,000. Thus the Installed Cost is $1,500,000.This new machine will be sold five years from today when this project is completed. We believe that it can be sold for $100,000 in five years. If this project is accepted, then an old, fully depreciated, machine will be replaced. The old machine can be sold for $50,000 today. The Installed Cost of this new asset will be depreciated using the IRS 5-year MACRS schedule: year 1, 20%; year 2, 32%; year 3, 19.2%; year 4, 11.52%; year5, 11.52%; and year 6, 5.76%. Note that these yearly amounts sum to 100%. The project will increase revenues and operating expenses (before depreciation and amortization) by $800,000 and $300,000 per year, respectively, for each of the following five years (t=1 to t=5).

An initial increase in Net Working Capital of $50,000 is required today and this amount will be recovered in 5 years when the project is terminated. No other changes in NWC will be required during the projects life. The cost of capital of the project is r=11%. The corporate income tax rate is 40%.

You are required to determine the following:

a) Compute the relevant cash flows

b) Compute the NPV, IRR , Payback period and profitability index to decide whether a firm

should start this project or not.

b) Compute the NPV, IRR , Payback period and profitability index to decide whether a firm

should start this project or not.