Year 0	Year 1	Year 2	Year 3	Year 4
Unit Price			2	2	2	2
Unit sales			425000	425000	425000	425000
Revenues			850000	850000	850000	850000
Operation Costs			637500	637500	637500	637500
Depreciation			188100	256500	85500	39900
Other Project			20000	20000	20000	20000
Effects
Before-tax income			4400	-64000	107000	152600
Taxes			1760	-25600	42800	61040
Net Income			2640	-38400	64200	91560
Plus depreciation			188100	256500	85500	39900
Net op cash flow			190740	218100	149700	131460
Salvage value						100000
SV tax						40000
Recovery of NWC						10000
Termination CF						70000
Project NFC		($580,000)	190740	218100	149700	201460
Cumulative CF		($580,000)	($389,260)	($171,160)	($21,460)	$180,000

Discount rate = 11.11%

4. Now assume that the sales price will increase by the 5 percent inflation rate beginning after Year 0. However, assume that cash operating costs will increase by only 2 percent annually from the initial cost estimate, because over half of the costs are fixed by long-term contracts. For simplicity, assume that no other cash flows (net externality costs, salvage value, or net working capital) are affected by inflation. What are the projects NPV, IRR, MIRR, and payback now that inflation has been taken into account? (Hint: The Year 1 cash flows, as well as succeeding cash flows, must be adjusted for inflation because the original estimates are in Year 0 dollars.)

5. The second capital budgeting decision which Lili and Brent were asked to analyze involves choosing between two mutually exclusive projects, S and L, whose cash flows are set forth as follows:

Year	Project S	Project L
0	(100,000)	(100,000)
1	60,000	33,500
2	60,000	33,500
3		33,500
4		33,500

Both of these projects are in Indian Rivers main line of business, orange juice, and the investment, which is chosen, is expected to be repeated indefinitely into the future. Also, each project is of average risk, hence each is assigned the 10 percent corporate cost of capital. a. What is each projects single-cycle NPV? Now apply the replacement chain approach and then repeat the analysis using the equivalent annual annuity approach. Which project should be chosen, S or L? Why? b. Now assume that the cost to replicate Project S in two years is estimated to be $105,000 because of inflationary pressures. Similar investment cost increases will occur for both projects in Year 4 and beyond. How would this affect the analysis? Which project should be chosen under this assumption?

6. The third project to be considered involves a fleet of delivery trucks with an engineering life of three years (that is, each truck will be totally worn out after three years). However, if the trucks were taken out of service, or abandoned, prior to the end of three years, they would have positive salvage values. Here are the estimated net cash flows for each truck:

Year	Initial Investment and Operating Cash Flow	End-of-Year Net Abandonment Cash Flow
0	($40,000)	40,00
1	16,800	24,800
2	16,000	16,000
3	14,000	0

The relevant cost of capital is again 10 percent. a. What would the NPV be if the trucks were operated for the full three years? b. What if they were abandoned at the end of Year 2? What if they were abandoned at the end of Year 1? c. What is the economic life of the truck project?