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Tony Inc. is considering introducing a new manufacturing plant. The initial investment in the plant is $330,000 incurred today (Year O). The plant has an
Tony Inc. is considering introducing a new manufacturing plant. The initial investment in the plant is $330,000 incurred today (Year O). The plant has an expected life of 3 years. The plant is fully depreciated during the next three years sing the straight-line depreciation method with a zero expected disposal value at the end of the project The annual sales revenue of the plant is expected to be $1,200,000 from Year 1 to Year 3. The new plant will incur total operating costs of $900,000 per year. An additional working capital of $30,000 is required at the beginning of the investment. The working capital will be repaid after the project is finished. Assume the corporate tax rate is 30% and the firm's cost of capital is 15% Required: a) What is the project's total Free Cash Flow in year 0? Explain. (2 marks) b) What are the project's total Free Cash Flows from Year 1 to Year 2? Explain. 12 marks) c) What is the project's total Free Cash Flows in Year 3? Explain. (2 marks] d) What assumptions do NPV and IRR make about the reinvestment of a project's cash flows over its life? Which assumption is more realistic? Explain your answer. (2 marks] Type your answer into the answer box, NOT into the Notes box; uploading file is NOT accepted]
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