Assumptions: 1. The life of the project is expected to be 5 years. Please assume that the analysis is taking place at the end of 2021. 2022 will be the first year of operation. 2. T-shirt Corp. needs to invest in a machine that would print designs on the t-shirts. The machine costs $10,000 and will be depreciated fully using a straight line method over 10 years. At the end of 2023, the machine will be sold for $2,000.

3.

	2022	2023	2024	2025	2026
Number of t-shirts	2,000	3,000	4,000	5,000	6,000

4. The price of a t-shirt will be $15 in 2022 and will increase by 3% per year in the following years. 5. The cost of goods sold for one t-shirt will be $6 in 2022 and will remain the same in the following years. 6. The company will rent a store to run its operations. The rent and utilities is expected to cost $10,000 in 2022 and will increase by 2% each year afterwards. 7. In order to run the t-shirt venture, the Balanced Corp. will need to have 10% of the following years sales in its net working capital account. 8. Balanced Corp. will spend $5,000 for marketing each year starting in 2022. 9. The company spent $5,000 for market research in 2020. 10. Tax rate (federal plus state) is 25%. 11. The cost of capital for this project is estimated to be 12%. As a part of cost of financing, the company will have $1,000 in interest expenses each year.

a. Describe Net Present Value (NPV) as a capital budgeting rule. Make sure to talk about how you would reach a decision using NPV analysis. [5 points] b. Describe Internal Rate of Return (IRR) as a capital budgeting rule. Make sure to talk about how you would reach a decision using IRR analysis. [5 points]