Frito Lay is considering a new line of potato chips. This will be a two year project.

a. Frito Lay paid $1,000,000 last year to a winning person who thought of the new line of potato chips.

b. New equipment for the factory line will cost $12,000,000 and depreciation is by the 5-year MACRS method. Purchase of the equipment will require an increase in net working capital of $600,000 at time 0 (which will be recaptured at the end of the project).

c. The new potato chips will generate an additional $6,000,000 in revenues in the first year and $4,000,000 in revenues in the second year.

d. In addition to the additional revenues outlined in c. The new potato chips will decrease existing chip line revenues by $2,000,000 the first year. There will not be any effect in the second year.

e. The new project is estimated to have expenses of $150,000 each year.

f. At the conclusion of the project, the equipment can be sold for $7,000,000.

g. The firms marginal tax rate is 20 percent, and the projects cost of capital is 7 percent.

The following is the MACRS Depreciation Table:

Year	3-year	5-year	7-year
1	33.33%	20.00%	14.29%
2	44.44%	32.00%	24.49%
3	14.82%	19.20%	17.49%
4	7.41%	11.52%	12.49%
5		11.52%	8.93%
6		5.76%	8.93%
7			8.93%
8			4.45%

1. What is the terminal cash flow (the last cash flow of the project not including the OCF)?

2. What is the after tax OCF in year 1?

3. What is the after tax OCF in year 2?

4. What is the project's NPV?

5. What is the project's IRR?

6. Should you ACCEPT or REJECT the project?