Rio Grande Bookstores is considering a major expansion of its business. The details of the proposed expansion project are summarized below: The company will have to purchase $500,000 in equipment at t = 0. This is the depreciable cost. The project has an economic life of four years. The cost can be depreciated on a MACRS 3-year basis, which implies the following depreciation schedule: MACRS Depreciation Year Rates 1 0.33 2 0.45 3 0.15 4 0.07 At t = 0, the project requires that inventories increase by $50,000 and accounts payable increase by $10,000. The change in net operating working capital is expected to be fully recovered at t = 4. (Hint: NWC = CA-CL) The projects salvage value at the end of four years is expected to be $0. The company forecasts that the project will generate $800,000 in sales the first two years (t = 1 and 2) and $500,000 in sales during the last two years (t = 3 and 4). Each year the projects operating costs excluding depreciation are expected to be 60% of sales revenue. The companys tax rate is 40%. The projects cost of capital is 10%.

2. What is CFFA at year 4?

a. $150,000.

b. $174,000.

c. $282,000.

d. $500,000.

2a. What is CFFA at year 2?

a. $282,000

b. $290,000

c. $275,000

d. $320,000

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