1. Sustef Enterprises has been considering the purchase of a new manufacturing facility for $1.2 million. The cost of the facility is to be depreciated on a straight line basis over seven years. It is expected to have no value after seven years. Cash flows from depreciation are considered to be risk-free, so they should be discounted at the risk-free rate. Operating revenues from the facility are expected to be $500,000 during the first year. The revenues are expected to increase by 3 percent per year during the seven-year life of this facility. Production costs during the first year are $200,000, and they are expected to remain at that level. Of course, projected revenues and costs are only projections, so they could be higher or lower than what we project. The appropriate discount rate for risky cash flows is 11%, while the riskless interest rate is 2%. The corporate tax rate is 21%. What is the NPV of this investment?

2. A proposed project requires no working capital, but it does need an initial investment of $200,000 which can be depreciated to a value of zero on a straight-line basis for five years. During those five years, sales are expected to grow at a rate of 20% per year, starting with $100,000 during the first year. At the end of the five years, sales are expected to only grow at 3% per year in perpetuity. Expenses are expected to be $40,000 during the first year and are expected to grow at a rate of 3% in perpetuity immediately thereafter. The firms marginal tax rate is 21% and investors require an 18% rate of return on projects with this level of risk. What is the net present value of this project?