Local Cost Smartphones Inc (LCS) is considering launching a new smartphone. with a product life cycle of 4 years. The firm expects to sell 10 million units per year over the next 4 years. The price of the smartphone is expected to be $99 per unit. which will decline by 5% per year.

The cost of production is expected to be $20 per unit. Furthermore, marketing and support costs are expected to be $2.5 million per year during the product life.

Initial capital expenditures are $100 million, 20% of which are expected to be salvaged at the end of year 4. There is an initial increase in NWC of $5 million during each of the first 2 years. In year 3. NWC will remain at the level of Year 2. Investments in NWC will be recovered at the end of year 4.

Note the following assumptions. Purchased capital assets become part of the CCA asset pool depreciated at the rate 40% per year and it is expected that in year 4 there will be a continuing pool and negative net additions. Furthermore, the firm's income tax rate is 35% and its cost of capital is 8%.

a) Determine the impact on NPV of the items listed below. Be careful: for items that have a negative impact on NPV, indicate their amounts as negative numbers.

i.) the initial capital expenditure and salvage of capital assets (ignore CCA tax

shields at this point)?

ii.) the incremental revenues of the project?

iii.) the incremental production costs of the project?

iv.) the changes in net working capital amounts?

v.) the equipment's CCA tax shields?

b) Determine the NPV of the new smartphone product?

c) Should the new smartphone product be launched? Why?