Ocean Tide Industries is planning to introduce a new product with a projected life of eight years.

The project is in the governments preferred industry list and qualifies for a one-time subsidy of $2,000,000 at the start of the project.

Initial equipment (IE) will cost $14,000,000 and an additional equipment (AE) costing $1,000,000 will be needed at the end of year 2.

At the end of 8 years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for its book value of $100,000.

A working capital of $1,500,000 will be needed. The sales volume over the eight-year period have been forecast as follows: Year 1 80,000 units Year 2 120,000 units Years 3-5 300,000 units Years 6-8 200,000 units A sale price of $100 per unit is expected and the variable expenses will amount to 40% of sales revenue.

Fixed cash operating expenses will amount to $1,600,000 per year. Additionally, an extensive advertising campaign will be launched, which will need annual expenses as follows:

Year 1 $3,000,000

Year 2 $1,500,000

Years 3-5 $1,000,000

Years 6-8 $400,000

The company falls in the 50% tax category and believes 12% to be an appropriate estimate for its after-tax cost of capital for a project of this nature.

All equipment is depreciated on a straight- line basis. In the event of a negative taxable income, the tax is computed as usual and is reported as a negative number, indicating a reduction in loss after tax. You are required to:

1. Compute the initial cash flow for the project

2. Compute the earnings before taxes for years 1 through 8

3. Compute the earnings after taxes for years 1 through 8

4. Compute the OCF for years 1 through 8

5. Compute the Terminal cash flow

6. Compute the FCF for years 1 through 8

7. Compute the NPV and IRR

8. Should the project be accepted?

Note please answer number 4,5 and 6