Year 1. Tubby Toys is considering investing in a new machine for $10m that allows it to produce a new line of rubber ducks. It estimates that this new line will generate sales of $7m and operating costs of $4m. It thinks that the machine will work for 5 years and can be sold for $2m after that. a. If the tax rate is 35% and the company's required rate of return is 12%, what is the NPV of the project? b. After the initial proposal, Tubby Toys' managers realized that in order for sustain the project, they need to make an investment in working capital of $1m in the same year that they purchase the machine. This level of working capital will stay the same in subsequent years. This investment in working capital will be recovered when they sell the machine. What will the new NPV be? Answer: a. $182,842; b. -$249,731 Part a. Capital Investment (1) Working Capital Change in Working Capital (WC - WC1-1) (2) Operating Cash Flow Revenue Costs Depreciation Pre-tax Income (Revenue - Costs - Depreciation) Taxes (35% pretax income) After-tax Income (Pre-tax income - Taxes) OCF (added Depreciation) (3) Total Cash Flow (1+2+3) Present Values of Cash Flows NPV (sum of all Present Values) 0 1 2 3 4 5