(a.) Suppose you are the risk manager for a company considering a $4,800,000 investment in a new 12-year project. The $4.8 million cost of the project will be depriciated on a straight-line basis over 8 years. The project is expected to generate positive operating cash flows equal to $1,400,000 per year (not including the effect of depriciation or taxes). The company's tax rate is 35%. Ignoring any risk management considerations, evaluate the project by calculating its net present value and internal rate of return. Assume the company has a required return of 12%.

(c.) Recalculate the net present value and internal rate of return for the project taking into consideration the potential liability exposure and assuming a loss reserve is set up to handle the losses. Any funds set aside in the reserve will earn interest at 3% per year.