A gambling company is considering buying a new machine that costs 100,000. The machine requires 12,000 per year working capital from year 0 to year 4, and zero in year 5. The machine has 5 years of useful life, after that, it can be sold for a proceed of 8,000. The machine requires a maintenance overhaul costing 14,000 at the end of year 4. The overhaul is fully expensed when it is done. The company uses straight-line depreciation and the machine will be depreciated to a residual value of 5,000 on a five-year basis. The company has a tax rate of 30% and the project cost of capital is 12%. The machine is expected to generate revenues of 100,000 in year 1, 120,000 in year 2, 140,000 in years 3 and year 4, and 80,000 in year 5. Variable costs (including all labour and material) will be 65% of revenues (Rounding to two decimal places).

Required:

i. Estimate the net cash flow generated by the project

ii. Calculate the net present value of the project and recommend whether or not the project should be accepted.

iii. Discuss the main problems that firms encounter when using WACC as the cost of capital for all their investment analyses