PESK PLC is evaluating a project with the following characteristics:

(1) Fixed capital investment is GH2,000,000.

(ii) The project has an expected six-year life.

(iii) The initial investment in net working capital is GH200,000. At the end of each year,

networking capital must be increased so that the cumulative investment in net working

capital is one-sixth of the next year's projected sales.

(iv) The fixed capital is depreciated 30 percent in year 1,35 percent in year 2, 20 percent

in year 3, 10 percent in year 4,5 percent in year 5, and 0 percent in year 6.

(v) Sales are GH1,200,000 in year 1. They grow at a 25 percent annual rate for the next

two years and then grow at a 10 percent annual rate for the last three years.

(vi) Fixed cash operating expenses are GH150,000 for years 1-3 and GH130,000 for

years 4-6.

(vii) Variable cash operating expenses are 40 percent of sales in year 1,39 percent of sales

in year 2, and 38 percent in years 3-6.

(viii)

The company's marginal tax rate is 30 percent

(ix) PESK will sell its fixed capital investments for GH150,000 when the project

terminates and recapture its cumulative investment in net working capital. Income

taxes will be paid on any gains.

(x) The project's required rate of return is 12 percent.

(xi) If the taxable income on the project is negative in any year, the loss will offset gains

elsewhere in the corporation, resulting in tax savings.

REQUIRED:

(a) Estimate the cash flows for each of the years.

(b) Determine whether this is a profitable investment using the IRR and PI.