CASE 3 (25 points) The company is considering a new four-year expansion project that requires an initial investment in manufacturing machinery of C1,670,000. The machinery will be depreciated straight-line to zero over its four-year tax life (depreciation rate is 25% per year). At the end of the project, the machinery can be sold for 26% of its original cost. The project requires an initial investment in net working capital of 198,000, all of which will be recovered at the end of the project. The project is estimated to generate C1,850,000 in annual sales; with annual costs of C1,038,000. The tax rate is 21 percent and the required return for the project is 16.4% Instructions: 1. Complete the pro forma below and determine free cash flows for each year of project's life. (20 points) 2. Would you recommend to accept or reject the project? Explain your decision. (5 points) 0 1 2 Year Sales Costs Depreciation EBIT Taxes Net income Operating Cash Flow Capital expenditure Net Working Capital After-tax salvage value Free Cash Flow