You are thinking of building a new bakery to bake moon cakes. New bakery will be built over two years. Today is 12/31/2014. The bakery will be ready to start production on 01/01/2017 and the first revenues and costs will be received and paid on 12/31/2017. The plant will cease production on 12/31/2019. Investment for bakery requires an outlay of $6 million on 12/31/2014. This investment can be fully depreciated on a straight-line basis over the three years the bakery is producing. These machines have no salvage value at the end of three years.

The bakery will produce 1.2 million moon cakes per year. In 2017, the bakery expects to sell the moon cakes for $20 per cake. The raw material costs are expected to be $4 per cake. Total labor costs will $1.5 m per year. The company expects to keep the production constant, but expects the selling prices, raw material costs, and labor costs to increase in 2018 and 2019 at the rate of inflation, which is expected to be 4% in the long run.

Total working capital requirement on 12/31/2016 to allow investment to be financed is $900,000. For the next year the working capital would be 10% higher. Thereafter working capital will remain constant until the end of project