Part 1 (25 marks) - Capital Budgeting As a senior analyst for Lawton Enterprise, you have been asked to evaluate a new computer hardware project with the following characteristics: Acquiring a computer hardware for a cost of $2,500,000. The computer hardware has an expected six-year life. The initial investment in net working capital (in Year 0) is $500,000. The investment in working capital is to be completely recovered by the end of the project's life (in Year 6). The computer hardware can be depreciated on a straight-line (prime cost) basis and there is no expected salvage value after six years. The produced software is expected to generate sales of $1,250,000 in Year 1. They grow at a 25% annual rate for the next two years, and then grow at a 10% annual rate for remaining years. Fixed operating expenses are $100,000 for Years 1-3 and $110,000 for Years 4-6. Variable operating expenses are 20% of sales in Years 1-2 and 25% of sales in Years 3-6. Lawton does not have any available space where the project can be located for six years and you anticipate to rent the required office space it would cost $65,000 per year for the life of the project. You expect that the project will need to hire three new software specialists at $50,000 (each specialist) per year (start in Year 1) for the full six years to work on the software. . The project will use a van currently owned by Lawton. Although the van is not currently being used by Lawton, it can be rented out for $20,000 per year for six years. The book value of the van is $20,000. The van is being depreciated straight-line (with six years remaining for depreciation) and is expected to be worthless after the sixth year. Lawton's marginal tax rate is 35%, and the discount rate is 11.5%. Based on the information presented above, answer the following questions. 1. (12 marks) Calculate the incremental free cash flow during the project's life (starting from Year O to Year 6). Show workings. 2. (13 marks) Calculate the NPV, payback period and IRR of the project. Should the project be accepted? Show workings and explain your answer(s).