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and it would cost another $30,000 to modify the equipment for special use by the firm. The equipment will be depreciated to zero value over

and it would cost another $30,000 to modify the equipment for special use by the firm.

The equipment will be depreciated to zero value over the 3 years using prime cost (straight line) method.The machine would be sold after 3 years for $60,000.The machine would require a $8,500 increase in net working capital and fully recover at the end of its 3-year life.The equipment should save the firm $50,000 per year in before-tax labor costs.

Below shows the forecasted sales revenues, variable cost and fixed cost.

Year 1

Year 2

Year 3

Sales quantity (units)

4,000

5,000

5,500

Selling price per unit

$4

$4

$4

Fixed cost of production (per year)

$1,500

$1,500

$1,500

Variable cost of production (per unit)

$1.1

$1.1

$1.1

The marginal tax rate is 40% and the discount rate is 10%.

i.What is the net present value (NPV) of the proposed project?

ii. Advise should the project be accepted based on your answer in part (i)?

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