Happy Holiday Inc (HHI) is considering a new capital budgeting project that will last for three years. The initial investment outlay for project equipment is expected to be $120,000. The equipment will be straight-line depreciated down to zero book value over the three-year period. The company anticipates it can sell the asset for $60,000 when the project is liquidated at the end of the third year.

The project requires an initial investment in Net Working Capital of $10,000 and another investment in networking capital in year 2 of $10,000.

The project also requires an additional investment in fixed assets during year 1, in the amount of $15,000.

HHIs cost of capital is 10% and the project does not have a distinct risk profile.

HHIs tax rate is 35%. Based on extensive research, analysts have prepared the below incremental revenues.

The gross margin is estimated to 50% of sales, and it is assumed to be the similar to those for other projects HHI.

Note: Additional fixed capital investments are depreciated straight line over a three-year period; the first depreciation expense is deducted at the end of the year following the investment. The $60,000 liquidation value reflects enhancements realized through capital investments in fixed assets. Also assume that the Net Working Capital will be recovered at the end of the project

a) Calculate the after tax cash flows from operations for each of the periods.

b) Calculate the terminal value of the project

c) Calculate the projects NPV and IRR

d) Based on your calculations, would you recommend that ABC pursues the project?