You are asked to evaluate the proposed acquisition of an equipment for a 2-year project.The equipment's base price is $1,200,000, and falls into the MACRS 3year asset class. The equipment will be sold at the end of the project's 2-year life for 20% of its base price.The initial (at t=0) net working capital (NWC) requirement is 8% of the base price of the equipment.The project is expected to increase annual revenues by $1,100,000, and annual operating costs by $500,000, respectively.Both revenues and operating costs figures are stated in today's constant dollar, i.e., in real terms.Throughout the life of the project, revenues and operating costs will grow at annual real rates of 1% and 3%, respectively, while the NWC requirement is expected to remain constant in real terms.The firm's tax rate is 21 percent, and the (nominal) discount rate is 14%.The inflation rate is 2%.

Notes: Assume symmetric tax treatment on capital gain/loss, i.e., tax subsidy on capital loss, and you are required to conduct your analysis in NOMINAL terms!!!

(a)Calculate the initial cash flow of the project.

(b)Calculate the annual (nominal) total cash flows during the life of the project.

(Note:Year 1's OCF is given as $564,248 for your use in your calculation such that you only need to calculate Year 2's OCF and the total CFs for BOTH years!)

(c)Numerically justify your investment decision on this project given the objective of a firm.

(d)Use the Fisher Equation to calculate the real discount rate.Would the NPV be overstated/understated (select one) if you mistakenly used the nominal discount rate to discount the real total cash flows of the project?

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