Franklin, Inc., a manufacturing company in Columbus, Missouri is considering expanding its operation. It plans to purchase hi-tech manufacturing equipment, a building, and land for $8,000,000. It expects to incur depreciation expense of $100,000 per year and expects to generate $400, 000 in operating income during each of its ten years of operation. Franklin customarily carries $350,000 of net operating working capital, mainly in the form of inventory and accounts payable. After ten years, it plans to salvage all assets for $10,000,000. Franklin, Inc. has a marginal tax rate of 35%.

a. What are its free cash flows for the purpose of capital budgeting?

Franklin, Inc. has two components of capital, common stock and corporate bonds. Its capital mix is similar to that of its competitors at 50% bonds and 50% common stock. It has a 3.0% pre-tax cost of debt and a 12% cost of equity.

b. Use the NPV method of capital budgeting to determine if Franklin should take on the project.

Answer in Excel.