QUESTION 2

Novartis International is considering purchasing a computer to streamline its raw chemical/material inventory management in order to raise drug production rates. The financial data is as follows:

Investment: $100,000

o60% debt equity ratio. Loan ($60,000) borrowed at 6% interest.

Project life: 4 years

Salvage value: $5,000

oYear 0 dollars

Depreciation method: 3-year MACRS

Income tax rate: 30%

Annual Revenue: $180,000

oYear 0 dollars

oAnnual Expense: $90,000

oYear 0 dollars

Does NOT include depreciation

Does NOT include interest

Market interest rate (i): 7%

If the general inflation rate during the next 6 years is expected to be 2% annually:

a.[7 points] Develop the income statement for the project.

b.[3 points] Develop the cash flow statement for the project.

c.[5 points] Determine the PW of the project. Is the project economically viable? Why?