PDQ Corporation is considering an investment proposal that requires an initial investment of $200,000 in equipment, $10,000 shipping cost and $30,000 installation cost. They have spent $10,000 for a consultant to decide if the project is feasible. Also $20,000 must be invested at time 0 in working capital. The proposed project will produce revenue of $250,000 per year and expenses will be 40% of revenues per year. The new equipment will be depreciated to straight line to zero over 4 years, but it is expected to actually be sold for $25,000 after four years. PDQ has 40% tax rate and 10 % cost of capital.

a) What is the initial investment?

b)What is the depreciation basis (original amount to depreciate)?

c) What is the cash flow for years 1 to 3?

d) What is the terminal cash flow in year 4 ?

e) What is NPV of the project?