A firm is considering introducing a new product. It forecasts incremental an- nual gross profits (sales minus costs) from the product of $123,750, $147,250, and $157,750 for the next three years, respectively.

The project requires the purchase of a factory for $150,000, which would be straight-line depreciated over its 8-year tax life. It is estimated that the factory can be sold for $69,500 at the end of the three-year life of the project. Starting the project requires an initial net working capital investment of $33,750, with further annual increases of $10,500 during the life of the project. All net working capital is fully recoverable at cost when the project terminates. The firm pays tax at a marginal rate of 35% and the appropriate cost of capital for the project is 13.1% per annum.

The projected Free Cash Flow is closest to _________ at the end of Year 2 and closest to _________ at the end of Year 3.

a. $73,025; $223,088 b. $73,025; $176,588

c. $102,275; $252,338 d. $91,775; $163,850 e. $91,775; $241,838

Which of the following is closest to the NPV for this firm of introducing the new product?

a. $78,600 b. $46,459 c. $68,891

d. $147,547 e. $122,797