The company is considering a new four-year expansion project that requires an initial investment in manufacturing machinery of 1,670,000. The machinery will be depreciated straight-line to zero over its four-year tax life (depreciation rate is 25% per year). At the end of the project, the machinery can be sold for 26% of its original cost. The project requires an initial investment in net working capital of 198,000; all of which will be recovered at the end of the project. The project is estimated to generate 1,850,000 in annual sales; with annual costs of 1,038,000. The tax rate is 21 percent and the required return for the project is 16.4%.

Instructions:

1. Complete the pro forma below and determine free cash flows for each year of project's life.

2. Would you recommend to accept or reject the project? Explain your decision.