PepsiCo Inc. is considering a proposal to manufacture a new kind of drink.

The project requires use of an existing warehouse that the firm acquired $6$ years ago for

$$400,000$ and currently rents, generating $$40,000$ of after$-$tax income $($profit$)$ per year.

Rental income is expected to remain constant for the next $10$ years. Assume the

warehouse was previously allocated $100\%$ bonus depreciation and has no remaining book

value.

In addition to using the warehouse, the project requires an upfront investment into

machinery of $$5,000,000.$ This investment can be fully depreciated under the straight$-$line

method over the next $10$ years for tax purposes. However, PepsiCo expects to terminate

the project at the end of $7$ years and to sell the machinery for $$1,000,000$

The project requires a net working capital investment equal to $10\%$ of projected sales

$($i$.$e$.,$ net working capital requirement in year $t$ is $10\%$ of sales in year $t+1).$ The net

working capital investment begins immediately $(t=0)$ and will be fully recovered at the

end of the project $(t=7).$

Sales of PepsiCo's drinks are expected to be $$6,000,000$ in the first year and are projected

to stay constant throughout the $7$ years life of the project.

Costs of goods sold and operating expenses $($excluding depreciation$)$ are $70\%$ of sales.

Profits are taxed at $20\%.$

The discount rate for projects of this sort is $13\mathrm{.}0\%$ per year.

What is the project's Free Cash Flow at time $0?$

What is the project's Free Cash Flows each year for years $1-6?$

What is the project's Free Cash Flow for year $7?$

What is the project's NPV$?$

What is the IRR of this project?