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 projects 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.

Lawtons marginal tax rate is 35%, and the discount rate is 11.5%. Based on the information presented above, answer the following questions.

Calculate the incremental free cash flow during the projects life (starting from Year 0 to Year 6). Show workings.

Calculate the NPV, payback period and IRR of the project. Should the project be accepted? Show workings and explain your answer(s).