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Hi, Could you please explain: 1) Why do I need the free cash flows?? The task seems to require calculations for NPV, IRR and a

Hi,

Could you please explain:

1) Why do I need the free cash flows?? The task seems to require calculations for NPV, IRR and a sensitivity analysis.

2) How are operating expenses and net working capital requirements related to this task?

3) Why do I need depreciation if it does not come under NPV or IRR?

4) Would we even depreciate a product development opportunity?

5) How am I to present these cashflows? Just write them down for each year?

Detail summary below:

New investment opportunity - product development and sales.

Life of the new product = 5 years.

Initial investment required = 11% of the PPE at the end of firm's accounting year 2017.

The project will require furthersubsequent investments in all five years of its life.

The initial investment will increase by 12%, 5%, 2% and 1% in years 1, 2, 3 and 4 respectively.

Investments are made at year end so no investment in the final year.

Revenues in Y1 = 2.8% of the total revenues of firm in 2017 accounting year.

The revenues will increase by 15% in year 2 and 15%, 5% and 5% in years 3, 4 and 5 respectively.

All cashflows occur at year end.

Operating costs and net working capital requirements are similar to the rest of the company and depreciation is in straight-line for capital budgeting purposes.

(This is not a requirement, just casually mentioned in text) Calculate the estimated Free Cash Flow for the new project using:

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