Astra Pty Ltd (Astra) is considering to invest in a new product which will require an initial investment of $200,000. This capital will be depreciated over five years using straight-line depreciation toward a zero salvage value. Estimated selling price is $35 with variable cost of $15 per unit and fixed cost of $70,000 per year (not including depreciation). Year 1 sales quantity is expected to be 10,000 units which is estimated to be increased by 3% each year. This investment requires 1% additional working capital each year for the additional sales for years 1-4 and zero additional working capital investment for year 5. 

 

1.  If Astra faces a 30% tax rate, what expected project FCFs for each of the next five years will result from the investment in new product?

2.  If Astra uses a 10% discount rate to analyze its investments, what is the project's NPV? Should the project be accepted? Why?