DOGSRULE Company is contemplating the purchase of a new piece of equipment that would cost $350,000.The equipment has a four-year life.It will depreciate straight-line.At the end of the project the company will sell the equipment for $40,000.You will save $130,000 before taxes per year and you will be able to reduce net working capital by $50,000.If the tax rate is 21%, what is the IRR?

a. Draw a timeline showing all cashflows.

• In time zero, you must consider the initial cost of the equipment AND the reduction in net working capital.If you reduce the NWC, it is a positive cashflow to the project.Next, calculate depreciation and then OCF using OCF=EBIT+D-T.(You could alternatively use the "tax shield approach" and get the same OCF.OCF = (S-C)(1-t) + Dt.)Plot on the timeline.Then consider the AFTER-TAX salvage value of the project the final year.You also have to consider the NWC increase at the completion of the project.

b. If there is a hurdle rate of 11%, calculate the NPV. Should you accept or reject the project?Why?