Parker Products manufactures a variey of household products. The company is considering introducing a new detergent. The company’s financial manager has collected the following information about the proposed project. (Note: You may or may not need to use all of this information, use only the information that is relevant.)

• The project has an anticipated economic life of 4 years.

• The company will have to purchase a new machine to produce the detergent. The machine has an upfront cost (t=0) of $2 million. The machine will be depreciated on a straight-line basis over 4 years (i.e. the company’s depreciation expense will be $500,000 in each of the first four years (t=1, 2, 3, and 4). The company anticipates that the machine will last for four years, and that after four years, it will be able to sell the machine for $500,000.

• If the company goes ahead with the proposed product, it will have an effect on the company’s net operating working capital. At the outset, t=0, inventory will increase by $140,000 and accounts payable will increase by $40,000. At t=4, the net operating working capital will be recovered after the project is completed.

• The detergent is expected to generate sales revenue of $1 million the first year (t=1), $2 million the second year (t=2), $2 million the third year (t=3), and $1 million the final year (t=4). Each year the operating costs (not including depreciation) are expected to equal 50 percent of sales revenue.

• The company’s interest expense each year will be $100,000.

• The new detergent is expected to reduce the after-tax cash flows of the company’s existing products by $250,000 a year (t=1, 2, 3, and 4).

• Discount rate to evaluate the project’s cash flows = 12%

• The company’s tax rate is 40%

Required: (Show all workings and formula)

1. Estimate the project’s cash flows. (Clearly show the answer)
2. Calculate the project’s Net Present Value (NPV). Should the project be accepted? Justify your answer.