Rather than taking a job making $150,000 per year, you run your own business for the next 10 years making art folders.

If a discount rate of 10% is appropriate for this project's cash flows, should you undertake the project? The corporate tax rate is 35%.

a) Use the straight line depreciation method for an initial investment (t=0) of a machine worth $1,000,000. The machine is expected to last 10 years and will have no salvage value.

b) A friend donates $30,000 of artwork for the folders for each of the next two years (t=1,2). You hire a full-time folder designer at $50,000 per year (t=1...10).

c) You expect revenues of $500,000 for the first five years (t=1,...,5), and then expect the revenues to jump up to $1,000,000 per year for the remaining five years (t=6,...10). The material costs, however, will remain at $250,000 per year throughout (t=1,...10).

d) Helping with material costs, you discovered material perfect for use. This should reduce material costs by $25,000 per year for the first five years (t=1,...5). (Alternatively, if you don't use this material in the project, you could make sales of $25,00 in each of the years t=1 to t=5).

f) With part of the investment financed with debt, an interest expense of $35,000 per year is expected.