XYZ Company has been offered a new contract to supply food and beverage to a large corporate customer EAT Company for a period of 5 years. It pays Analytics Consultants Company (ACC) $20,000 to conduct an analysis of the profitability of the venture to determine whether to take up the contract. EAT Company will pay XYZ Company $1 million per year under the contract. According to ACCs calculations, XYZ company would incur fixed costs of $200,000 per annum, while variable costs will account for 30% of sales. XYZ company will need to invest in a new equipment which will cost $500,000. The equipment will be depreciated on a straight-line basis to zero over the 5-year life. The equipment can be sold for its book value at the end of the contract. The company will need to increase net working capital by $2 million. In addition, it plans to issue bonds of $1 million for a 5- year term at a coupon rate of 5% priced at par. The company has an existing bank loan of $2 million. The tax rate is 30%. This new contract has the same risk as the average risk of the company. The beta of the XYZ Company is 0.8. Current Treasury bills yield is 3%. The return on the stock market is 10%. The Company has 1 million common shares with a market price of $3 per share. a) what is the operating cash flow

b) Compute the cash flows from assets for the project. c) Calculate the NPV of the project using a discount rate of 10% and determine if the project should be accepted. If the discount rate is not given, recommend the appropriate discount rate to use.