FUN Corp. is planning to add a new doll Lisa to their production line. Instead of purchasing a third-party research report, the marketing department of FUN Corp. conducted their own analysis which saved at least $20,000 for the firm. The assumptions about the expected revenues, expenses and capital investments are presented as the followings. (All numbers are in thousands of US dollars).

Assumptions:

• Please assume that the analysis is taking place at the end of Year 0. FUN Corp can undertake this project for 4 years OR for 5 years.
• Expected revenues for the next 5 year are:

	Year 1	Year 2	Year 3	Year 4	Year 5 (if applicable)
Revenues	10,000	20,000	22,000	15,000	8,000

• Cost of goods sold is expected to be 20% of that years revenue.
• Capital investment of machinery is $40,000 and will be paid in 2 equal installments ($20,000 each) at the beginning of Year 1 and Year 2.
• The full amount of machinery will be depreciated to zero using a straight-line method over 5 years. FUN Corp. have the option to stop the project and sell the machinery for $10,000 at the end of Year 4. Otherwise, the machinery will be worth nothing ($0) on the market by the end of Year 5.
• Net working capital equal to 10% of the following years projected sales. NWC will be fully recovered by the end of the project (whenever it ends).
• If the firm undertakes the doll Lisa, the free cash flow from existing doll Amy is projected to increase by $1,000 in Year 1, $3,000 in Year 2, $3,500 in Year 3 due to better brand recognition.
• Corporate income tax rate is 30%. The cost of capital for this project is estimated to be 20%.

Please answer the following questions:

1. What is the NPV of the project if the firm undertakes it for 5 years? What if for 4 years?
2. What is the payback period of the project if the firm undertakes it for 5 years? What if for 4 years?
3. How long would you recommend the firm to undertake this project for? Why?