2. he Beijing Hat Company (BHC) has a project to produce white summer hats with an English rose motif. The initial investment is 37 million and the project will last 10 years. The revenue in each year from year 1 to year 10 will be 26 million but the costs, which will be 10 million in year 1, will then grow by 17% each year over the life of the project. (This means that the costs in year 2, for example, will be 17% higher than the costs in year 1, the costs in year 3 will be 17% higher than the costs in year 2, etc.). BHC does not pay tax and the cost of capital for the project is 5% per year.

   1. (6 marks) Compute the free cash flows (FCFs) on the project.

   2. (5marks)BHC usually employs the internal rate of return(IRR)to assess projects. Under what circumstances is IRR a reliable rule for judging whether a project should be accepted?

   3. (5 marks) What are the problems in using IRR to decide whether BHCs summer hat project should go ahead?

   4. (4 marks) Should BHC go ahead with the project?