A gadget production factory will cost $40,000 (all numbers in thousands). It is expected to last five years. A three years MACRS will be used for depreciation towards a $10,000 salvage value. Sales are expected to be $100,000 with 80% cost of goods sold. Assuming 12% discount rate and 20% tax rate: a. Should the firm accept the project? b. The project will require a working capital of $60,000 in the initial year and held throughout the project life. Evaluate the project net present value. * 3 Year MACRS Year 1 2 3 4 Allowance 33 44 15 8

comment: if the question could be done using an income statement first and then figuring out NPV would be greatly appreciated.