Masters Australia Pty Ltd (Masters) is considering to invest in a new product which will require an initial investment of $3,000,000. This capital will be depreciated over five years using straight-line depreciation toward a zero salvage value.Estimated selling price is $200 with variable cost of $75 per unit and fixed cost of $500,000 per year (not including depreciation). Year 1 sales quantity is expected to be 10,000 units which is estimated to be increased by 3% each year. This investment requires 2% additional working capital each year for the additional sales for years 1-4 and zero additional working capital investment for year 5.

a)If Masters faces a 30% tax rate, what expected project FCFs for each of the next five years will result from the investment in new product?

5 Marks

b)If Masters uses a 15% discount rate to analyze its investments, what is the project's NPV? Should the project be accepted? Why?

3 Marks

c)What other two factors are needed to be considered in this investment analysis regardless of NPV? (Be innovative and think out of the box. No macroeconomic variables, like interest rates or inflation rates are acceptable).