1. You are given the responsibility of conducting the project selection analysis in your firm. You have gathered the following information for the proposed project:

1. The appropriate cost of capital is 12% and the firm has a tax rate of 30%.

2. The project has an economic life of 10 years.

3. The project is going to be built on a piece of land that the firm already owns. The market value of the land is $1,000,000.

4. If the project is undertaken, the firm will need to spend $100,000 on land improvement.

5. The firm has paid $200,000 to a marketing research firm for formalizing the project concept.

6. The firm has spent another $250,000 on R&D for this project.

7. The project will require an initial outlay of $20,000,000 for plant and machinery.

8. The sales from the project will be $15,000,000 per year of which 20% will be from lost sales of existing products.

9. The variable costs of manufacturing for this level of sales will be $9,000,000 per year.

10. The firm uses straight-line depreciation. The book value will be zero when the project ends. It is expected that $3,000,000 salvage value will be recovered when the project is completed.

11. The firm will need additional net operating working capital of $1,000,000 for undertaking this project. The NWOC can be fully recovered when the project is completed.

12. The project will require additional supervisory and managerial manpower that will cost $200,000 per year.

13. The accounting department has allocated $350,000 as allocated overhead costs for supervisory and managerial salaries.

1. Which costs are irrelevant and should not be considered? (There should be three items.)

1. Calculate the annual depreciation expense (in millions): (The book value will be zero when the project ends.)

1. Calculate total cash flow at t = 0 (total investments in millions):

1. What are the sales from the project after considering product cannibalization (in millions)?

1. Calculate annual operating cash flow (in millions): Use (Sales-Costs-Depr. Exp.)*(1-t)+Depr. Exp.

1. How much is the recovery of NOWC and after-tax salvage value at t = 10 (in millions)? Use salvage value-(salvage value-book value)*t+NOWC

1. Calculate total cash flow at t = 10 (in millions):

1. What is the NPV of the project? Should it be accepted by the firm?