X Inc., is planning to make a major capital investment decision for its future expansion. The cost of investment is $210,000 and installation etc. will add another $50,000. X is estimating that they will be able to sell at least 100,000 additional units of their new product at the price of $7 per unit for each of the next four years, which is the life of the project. This estimate is based on a market survey conducted by X at the cost of $30,000 before this decision to invest in this project. The variable cost is $3 per unit and the fixed cost will be $100,000 each year. The current assets will increase by $100,000 and the current liabilities will increase only by $30,000. This will be completely recovered/repaid at the end of the project. The new product will likely increase the sale of an existing product also by about $75,000 each year. X is using its existing vacant space that would have received a rent of $25,000 per year. This machine will be depreciated fully in four years using a straight-line method. However, X will be able to sell the machine for $40,000 at the end of project life. Assume a tax rate of 21% and risk-based cost of capital of 11%. Based on the above information, answer the following questions: 1. What is the initial cash outflow? (8) 2. What is the operating cash flow each year? (20) 3. What is the after-tax salvage value of the fixed asset? (5) 4. What is the terminal year cash flow? (10) 5. What is the NPV of the project and what is your decision to invest and why? (5) 6. What is the IRR of the project, what is your decision and why? (3) 7. What is the pay-back period? Write two drawbacks of this method? (4)

X Inc, is planning to make a major capital investment decision for its future expansion. The cost of investment is $210,000 and installation etc. will add another $0,000, X is estimating that they will be abfe to sell at fenst 100,000 additional units of their new product at the price of $7 per unit for each of the next four years, which is the life of the project. This estimate is based on a market survey conducted by X at the cost of $30,000 before this decision to invest in this project. The variable cost is $3 per unit and the fixed cost will be $100,000 each year. The current assets will increase by $100,000 and the current liabilities will inerease only by $30,000. This will be completely recovered/repaid at the end of the project. The new product will likely increase the sale of an existing product also by about $75,000 each year. X is using its existing vacant space that would have received a rent of $25,000 per year. This machine will be depreciated fully in four years using a straight-line method. However, X will be able to sell the machine for $40,000 at the end of project life. Assume a tax rate of 21% and risk-based cost of capital of 11%. Based on the above information, answer the following questions: 1. What is the initial cash outflow? (8) 2. What is the operating cash flow each year? (20) 3. What is the after-tax salvage value of the fixed asset? (5) 4. What is the terminal year cash flow? (10) 5. What is the NPV of the project and what is your decision to invest and why? (5) 6. What is the IRR of the project, what is your decision and why? (3) 7. What is the pay-back period? Write two drawbacks of this method? (4)