Mills Mining is considering an expansion project. The proposed project has thefollowing features:

- The project has an initial cost of $900,000 including shipping, handling, and installation. This is also the amount that can be depreciated using the following depreciation schedule: MACRS Depreciation Rates Year 1) 0.33, Year 2) 0.45, Year 3) 0.15, and Year 4) 0.07

- If the project is undertaken, at t = 0 the company will need to increase its inventories by $400,000, and its accounts payable will rise by $80,000. This net operating working capital will be recovered at the end of the projects life (t = 3).

- If the project is undertaken, the company will realize additional $800,000 in sales per year for the next three years (t = 1, 2, and 3). The companys additional operating costs (not including depreciation) will equal $300,000 a year.

- The companys tax rate is 30 percent.

- At, t = 3, the projects economic life is complete, but it will have a salvage value

(before-tax) of $100,000.

- The projects WACC is 9.73 percent.

- The company is very profitable, so any accounting losses on this project can be used to reduce the companys overall tax burden.

a. Calculate projects initial year cash flow, i.e. CF0.

b. Calculate projects net operating cash flows for periods 1 to 3.

c. Calculate projects terminal cash flows

d. Show all the cash flows and WACC on a timeline and calculate its NPV and IRR.

e. Would you accept or reject the project? Explain.