Lawton Enterprises is evaluating a project with the following characteristics: Fixed capital investment is $2,000,000 The project has an expected 6-year life The initial investment in working capital is $200,000. At the end of each year, working capital must be increased so that the cumulative investment in net working capital is one-sixth the next years projected sales. The Fixed capital is depreciated 30 percent in year 1, 35 percent in year 2, 20 percent in year 3, 10 percent in year 4, 5 percent in year 5, and 0 percent in year 6. Sales are $1,200,000 in year 1. They grow at a 25 percent annual rate for next two years, and then grow at a 10 percent annual rate for the last three years. Fixed cash operating expenses at $150,000 for years 1-3 and $130,000 for years 4-6. Variable cash operating expenses are 40 percent of sales in year 1, 39 percent of sales in year 2, and 38 percent of sales in years 3-6. Lawtons marginal tax rate is 30 percent. Lawton 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 percent. If taxable income on the project is negative in any year, the loss will offset gains elsewhere in the corporation, resulting in tax savings.

a. Determine if this is a profitable investment using NP1 and IRR b. If the tax rate increases to 40 percent and the required rate of return increases to 14 percent, is the project still profitable?