1. XYZ Company has had a project on the books for 6 years now. The Company recognizes that the project needs to close as the equipment involved is no longer able to function; it has salvage value of $10,000. The equipment has been fully depreciated and there is $25,000 in net working capital investment outstanding.

However, it is wondering whether to invest in new state-of-the-art technologically advanced equipment that would allow the project to be extended by another five years, and then fully close the project. The cost estimate of the new replacement equipment is $200,000. It will take $40,000 to fully install and will require an incremental $40,000 in additional net working capital to make the new equipment operational. At the end of the five years, the new equipment will be full depreciated and is estimated to be able to be sold for $20,000.

The forecasted operating pre-tax cash flows for the next five years are:

Year One Two Three Four Five

$15,000 $30,000 $35,000 $35,000 $30,000

The CFO demands a minimum of a 10% per annum return and requires you to include the relevant tax implications into your analysis (assume 25% tax rate).

What is NPV (net present value) of going ahead and extending the project for another five years? (18 points)

Should XYZ Company go ahead and extend the project by making this investment? Why or why not? (3 points)