Use theinformation below to answer the next four questions.

You are currentlypursuingyour childhood dream of runninga cupcake shop in downtown NYC. Currently, you only sellcupcakes; however, you are considering expanding your selection to providing cookiesand brownies with the hopes of undercuttingLevain Bakery.

You have old equipment with a current market value of $15,000 that you plan on selling today.The old equipment has a current book value of $11,000.

Expansion will require the purchase of new, high-tech cookie equipment at a cost of $32,000. Additionally, you will incur shipping costs of $4,000 on the new equipment. If purchased, the new equipment will be depreciated via the 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%).If you invest in the new equipment, your working capital requirements will increase immediately by $40,000.

You estimate that your company, Georgetown Bakery,will experience an increase in annual revenueof $110,000 in year 1, with a 5% growth in yearly incremental revenues thereafter,because of this expansion project. Since you have to hire new bakery artists, the annual operating costs will increase by $13,000 in year 1, with a 3% growth in yearly incremental costs thereafter.

You estimate the market value of the new equipment to be $20,000 in five years at which time you anticipate selling the equipment.You estimate75% of the networking capital investment will be recovered at the end of the 5-year project. Your firm has a 9% cost of capital and a tax rate of 45%.

The net proceeds from the sale of the old machiene are closest to:

• $13,200
• $15,000
• $11,000
• $8,250

What is Year 2's Free Cash Flow (aka differential or annual CF)?

• $58,320
• $58,534
• $49,825
• $61,345

What are the tax consequencesfor the sale of Georgetown'snew machinery at the end of year5? (Hint: This is one of the steps incalculating Terminal Value)

• Tax Liability of $3,423
• Tax Shield of $3,423
• Tax Shield of $8,060
• Tax Liability of $8,060

What is the NPV for Georgetown's expansion project?

• $168,003
• $202,760
• $205,233
• $168,998