ABC Inc. is evaluating a project that will increase annual sales by $230,000 and annual cash costs by $88,000. The project will initially require $145,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 35 percent.

A. What is the depreciation tax shield? (Hint: Use straight-line depreciation to find annual depreciation)

B. Using the straight-line depreciation method, what is the book value of the asset at the end of year 2?

C. The asset for the project is classified as a 5-year property for MACRS. What is the book value of the asset at the end of year 4?

D. What is the operating cash flow for this project?

E. ABC Inc. has determined that it requires $35,000 in NWC, has a required rate of return of 14%, and plans on using the operating cash flow from problem D to evaluate its project. What is the NPV? Using the decision rule, should we accept the project? (Hint: Include NWC at the beginning and end of project)