In anticipation of the year 2008 Olympics in Beijing, China, TingTing Inc. is considering getting into the souvenir business. One idea under consideration is the production of panda bear statuettes. A machine costing $60,000 will have to be purchased and this new machine will have a life of three years (for both actual and tax purposes) and after three years the machine will have zero salvage value. In terms of depreciation, the machine will be depreciated on a straight-line basis. TingTing Inc. believes it can sell 5,000 souvenir statues per year at a price of $15 each. For each statue the variable costs are $3 and fixed expenses (this does not include depreciation) will be $4,000 per year. The cost of capital for TingTing Inc. is 14% and the tax rate is 35%. The figures given above assume that there will be no inflation.

(a) Compute the series of expected cash flows

(b) Compute the project's NPV. Is it a worthwhile project?

(c) What is the NPV breakeven quantity?(1 point)

Now assume that over the next three years the expected rate of inflation is 7% per year. Also assume that in this environment both revenues and nondepreciation expenses increase at that rate and the cost of capital remains the same.

(d) Compute the series of expected nominal cash flows.

(e) Compute the NPV of nominal cash flows. Is the project worth undertaking?