F Inc. is a company that operates fast food restaurants and it is considering producing packaged food for sale at grocery stores. The initial investment in production facilities to start this venture will be $ 3 million. The facilities has a three-year life and is depreciated to zero on a straight line basis. The production facilities can be sold for $100,000 at the end of year 3. The variable cost per package is $20, and the fixed cost including salary and renting expense is $810,000 per year.

The F Inc. spent $10,000 to do a market research and found that, at the price of $60 per package, the company will sell 50,000 Packages for the first year. The sales in packages will grow 5% each year. The net working capital is expected to be 10% of revenues, with the investment occurring at the start of each period, where needed. At the end of the project’s life, the Company will recover the net working capital.

The cost of capital for F Inc. is 8%. The marginal tax rate is 40%.

1. Identify operating cash flows each year (show the details of your calculation).

2. Identify total cash flows from assets (CFFA) each year (show the details of cash flows).

3. Estimate the NPV of the investment. Would you suggest to accept the project?(Rounding your answers to two decimal places)

4. What is the operation leverage of this project in year 1 (ignoring taxes)?(Rounding your answers to two decimal places) What are the implications of the operating leverage for evaluating this project?