Jackson Corporation is evaluating a project with the following characteristics:

• Fixed capital investment is $2,000,000.

• The project has an expected six-year life.

• The initial investment in net working capital is $200,000. At the end of each year, net working capital must be increased so that the cumulative investment in net working capital is one-sixth of the next years projected sales.

• The fixed capital is depreciated 30% in Year 1, 35% in Year 2, 20% in Year 3, 10% in Year 4, 5% in Year 5, and 0% in Year 6.

• Sales are $1,200,000 in Year 1. They grow at a 25% annual rate for the next two years, and then grow at a 10% annual rate for the last three years.

• Fixed cash operating expenses are $150,000 for Years 1-3 and $130,000 for Years 4-6.

• Variable cash operating expenses are 40% of sales in Year 1, 39% of sales in Year 2, and 38% in

  Years 3-6.

• Jacksons marginal tax rate is 25%.

• Jackson will sell its fixed capital investments for $150,000 when the project terminates and recapture its cumulative investment in net working capital. Income taxes will be paid on any gains.

• The projects required rate of return is 12%.

• If taxable income on the project is negative in any year, the loss will offset gains elsewhere in the

  corporation, resulting in a tax savings.

  Questions

  (i) Determine whether the project is a profitable investment using the NPV and IRR. Provide explanation. (ii) Compute the payback period for the project.

  (iii) Conduct a sensitivity analysis for NPV using the required rate of return ranging from 2% to 22% with a 0.5% increment and the tax rate ranging from 10% to 40% with a 1% increment.