As a senior analyst for Lawton Enterprise, you have been asked to evaluate a new computer

hardware project with the following characteristics:

$$ Acquiring a computer hardware for a cost of $$2,500,000.$

$$ The computer hardware has an expected six$-$year life.

$$ The initial investment in net working capital $($in Year $0)$ is $$500,000.$ The investment in

working capital is to be completely recovered by the end of the project$$s life $($in Year $6).$

$$ The computer hardware can be depreciated on a straight$-$line $($prime cost$)$ basis and there

is no expected salvage value after six years.

$$ The produced software is expected to generate sales of $$1,250,000$ in Year $1.$ They grow

at a $25\%$ annual rate for the next two years, and then grow at a $10\%$ annual rate for

remaining years.

$$ Fixed operating expenses are $$100,000$ for Years $1-3$ and $$110,000$ for Years $4-6.$

$$ Variable operating expenses are $20\%$ of sales in Years $1-2$ and $25\%$ of sales in Years $3-6.$

$$ Lawton does not have any available space where the project can be located for six years

and you anticipate to rent the required office space it would cost $$65,000$ per year for the

life of the project. You expect that the project will need to hire three new software

specialists at $$50,000($each specialist$)$ per year $($start in Year $1)$ for the full six years to

work on the software.

$$ The project will use a van currently owned by Lawton. Although the van is not currently

being used by Lawton, it can be rented out for $$20,000$ per year for six years. The book

value of the van is $$20,000.$ The van is being depreciated straight$-$line $($with six years

remaining for depreciation$)$ and is expected to be worthless after the sixth year.

$$ Lawton$$s marginal tax rate is $35\%,$ and the discount rate is $11\mathrm{.}5\%.$

Based on the information presented above, answer the following questions.

$1.(12$ marks$)$

Calculate the incremental free cash flow during the project$$s life $($starting from Year

$0$ to Year $6).$ Show workings.

$2.(13$ marks$)$

Calculate the NPV$,$ payback period and IRR of the project. Should the project be

accepted? Show workings and explain your answer$($s$).$