PROBLEM 1 - INVESTMENT CHOICE (15 marks) MSW inc. is considering the introduction of a new product BT PRO-5. The company invested 500,000 on R&D over the 3 past years to develop the new product. The introduction of the new product will generate additional revenues of 300,000, 350,000, 370,000, 330,000 at the end of each year for 4 years. Operating expenses related to the new project are expected to represent 50% of additional revenues. The project will require purchase of new equipment to produce BT PRO-5 at a cost of 550,000. It would be depreciated for 400,000 using straight-line method over its useful life estimated at 4 years. It could be sold at the end of this useful life for a salvage value of 150,000, equal to its book value. Due to the initiation of project, MSW plans to sell in year 0 an existing equipment with a book value of 80,000 at 100,000 (selling price). The new project requires an initial investment in working capital of 130,000 in year 0. The discount rate applicable to the project is 12% and the companys tax rate is 40%

REQUIRED

1. Calculate the new projects net present value (NPV) and explain whether MSW inc. should go ahead with the production of BT-PRO5.

2. Calculate the discounted payback period.