You have been asked to help a manufacturing company decide whether it should invest in a new 3 year project.To help with your analysis, the firm has provided you with the following projected income statements for the project.

Year 1Year 2Year 3

Revenue$10,000$11,000$12,500

Cost of Goods Sold4,0004,5005,000

Amortization4,0003,0002,000

EBIT2,0003,5005,500

In addition, the following information has been provided.The project will require an initial investment of $15,000 in new equipment and one-time maintenance costs for the equipment of $2,000 at the end of year two (2).The equipment is expected to have a salvage value of $6,000 at the end of the project.Working capital requirements are expected to be 10% of the first year revenue.The company's tax rate is 40%, its cost of capital is 18% and the CCA rate on the equipment is 25%.

Required:

a. Using NPV method should the project be undertaken?Explain and show all calculations.(14 marks)

b. Identify two sources of risk relating to the analysis of cash flows for international projects that are not relevant if the project were a domestic project. (2 marks)

c. Briefly describe how a capital budgeting decision is made using the payback period method and how it is made using the internal rate of return (IRR) method. (4 marks)