Problem 5 Basket Wonders (BW) is considering the purchase of a new basket weaving machine. This machine will cost $50,000 while shipping and installation costs another $20,000. The machine, under IRS's regulations, falls under the three-yearMACRS class. Initial net working capital requirement is $5,000, and is expected to be fully recovered by the end of the project's life. Lisa Miller is the firm's newly hired expert who currently works in the Purchasing Division. The company pays her a fixed salary of $7,500 per month to take care of the company's purchasing activities. Lisa forecasts that with the purchase of this basket weaving machine, Basket Wonders' revenues will increase by $110,000 for each of the next four years while operating costs will rise by $70,000 for each of the next four years. This machine will then be sold (scrapped) for $10,000 at the end of the 4"year, when the project ends. This company is in the 40% tax bracket al What is the depreciable basis for this new basket weaving machine? b/ Why net working capital is fully recovered at the end of project's life? c/ Given a discount rate of 20%. calculate the NPV of this project. What should Lisa say about this project? Problem 6 Golden Gate Windsurfing Inc. is considering a project to expand its current operation. Given the following information and assuming straight-line depreciation to zero: What is the net present value of this project? Should Golden Gate Windsurfing Inc. accept the project and why? Market research study = $15,000 Project life = 5 years Initial investment on fixed assets = $320,000; the fixed assets will be sold for $30,000 at the end of year 5. Initial working capital = $25,000 (the money will be recovered on closure of the project) Operating income = (sales - costs) = $150,000 per year: Losses in current sales if proceed the project: $20,000 in year 1 and $16,000 in year 2 Corporate tax rate = 25% Discount rate 13.45%