Apexview Inc., is considering a production line that costs $4 milliOn at Time 0 and will be worth nothing after 3 years. The equipment will have depreciation expenses of $0.8 million, $1.6 million, and $1.6 million in Years 1, 2, and 3, respectively. The production line will produce revenues as in the following table:

year 1 2 3

Sales $3 million $4 million $5 million

Operating costs (excluding depreciation) will be 50 percent of sales. You estimate that net working capital (NWC) at the end of each year will be 10% of sales for the year, respectively. Funds will be tied up in the NWC and will be recovered when the production line is closed at the end of Year 3.

The company's cost of capital is 10 percent. Its interest expense each year will be $0.2 million.

Apexview has a 20 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative.

Required:

a) Should you include the interest expense as relevant cash flows? Explain. (3 marks)

b) Determine the operating cash flow (OCF) in each year. (5 marks)

c) Determine the cash flow related to net working capital in each year. (4 marks)

d) Determine the total relevant cash flows from the project in each year. (4 marks)

e) What is the net present value of this project? Should the company accept the project? Explain. (4 marks)