is deciding on investing in a 5-year project. The key information for this project is provided below. R190,000 has already been spent on initial research. Forecasted annual revenues at end of each year are shown below. Year 1: R1.00 million Year 2: R1.25 million Year 3: R1.50 million Year 4: R1.75 million Year 5: R2.50 million Forecasted annual operating costs are 60% of annual revenues. The initial cost of the equipment for the project is R1,000,000. Removing the equipment at the end of the project will equal its actual value, so it will essentially be worthless on market value basis. The company expects a useful life of 5 years for the equipment and will depreciate it on a straight-line basis over the 5-year life with zero salvage value at the end of the 5 years At inception, the project requires a working capital investment of R200 000 and from year 1, additional net working capital investments at the beginning of each year equals 25% of the projected increase in revenue. (HINT: additional net working capital at beginning of year 1 = 25%*(revenue in year 2 revenue in year 1). Assume a 40% income rate tax, and a weighted average cost of capital of 15%. Determine the relevant cash flows for the project and answer the following questions. What is the payback period of this project? What is the NPV of this project? What is the profitability index of this project? Should XYZ Inc. undertake this project? Why?

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