Consider a firm that is investing Eur 24,000,000 in a new project to buy fixed assets. The tax authority allows you to depreciate the assets according to the following schedule: Percentage of initial investment Year 1 = 20% Year 2 = 30% Year 3 = 30% Year 4 = 10% Year 5 = 10%

The project has a 4 year life and its asset can be sold for an expected before-tax salvage value of Eur 3,500,000 at the end of the projects life. The expected sales are reported below: Sales EUR Year 1 = 9000000 Year 2 = 12000000 Year 3 = 14000000 Year 4 = 10500000

The cost of goods sold is 35% of the revenues from sales. At the end of the first three years the inventory is 5% of the sales, account payables are 10% of the cost of goods sold and the account receivables are 7% of the sales. At the end of the fourth year the net working capital will drop to 0. The corporate tax rate is 34%.

1. a) What are the cash flows associated with the net working capital for every year?

2. b) What are the yearly cash flows produced by the project?

3. c) If the opportunity cost of capital for the depreciation tax shield (tax saved thanks to the

   depreciation) is 4.50% while the opportunity cost of capital for the remaining cash flow is 8.50%, what is the NPV of the project?