Selidocorc, Inc., is considering a new project that requires an initial investment (at time zero) of $10,000 in plant and equipment, and a second investment of $8,000 in plants and equipment in one year. These assets will be depreciated straight-line (to zero) over the 10 years after they are acquired. The firm's CFO has produced the following projections for the first few years of the project.

End of year

0123

Sales30,00032,00038,000

Cogs and sg&A26,00029,00033,000

Net working capital2,0004,0005,000

The corporate tax rate is 50%. The firm's cost of capital (i.e., discount rate) is 15%.

(a)What is the depreciation expense in year 1, in year 2, and in year 3?

(b)Calculate the project's free cash flows for the first three years.

(c)These free cash flows are expected to grow in perpetuity at 3% a year starting with the free cash flow at the end of year 3 (FCF3, from part (a)). Calculate the project's terminal value at the end of year 3. Recall that this is the value (at year 3) of all the free cash flows that comeafteryear 3.

(d)Calculate the project's net present value.