Problem 2: Capital Budgeting (24 Marks) Equinox Pty Ltd is planning to undertake a new project that is expected to have a 5-year economic life. The project will have an initial cost of $150,000. Installation and shipping charges for the equipment are estimated at $15,000 which will need to be capitalized. The equipment will be depreciated straight line to zero over a five years period. A working capital investment of $11,000 is required immediately to undertake the project. The working capital will be recovered at the end of the project. The revenues from the project is expected to be $75,000 for the first year and to remain constant thereafter. The operating costs exclusive of depreciation are estimated to be $22,000 in the first year and stay as it is till the end of the project. The firm's marginal tax rate is 30%. The expected salvage value of the equipment at the end of year 5 is $25,000. Assume that the firm's cost of capital is 15%. B. What are the annual free cash flows for this new project in the first four years? (5 marks) What are the annual free cash flows for this new project in the fifth year? (5 marks) What is the NPV of this project? Would you accept or reject this new project? (6 marks) Suppose you are considering two projects. Project A requires initial investment of $115,000 upfront and then followed by a series of free cash flow of $40,000 per year for the next four years. Project B requires initial investment of $70,000 upfront and then then followed by a series of free cash flow of $33,000 per year for the next three years. D. With 10% cost of capital and based on equivalent annual annuity approach, which project should you undertake? Explain why? (8 marks)