Your company is considering an expansion into a new product area. The company has collected

the following information about the proposed product. $($Note: You may or may not need to use

all of this information, use only the information that is relevant.$)$

$$ The project has an anticipated economic life of $4$ years.

$$ The company will have to purchase a new machine to produce the product. The machine

has an up$-$front cost $($T $=0)$ of $$500,000.$ The machine will be depreciated on a straight$-$line

basis over $4$ years $($that is$,$ the company's depreciation expense will be $$125,000$ in each of

the first four years $($T $=1,2,3,$ and $4).$ The company anticipates that the machine will last

for at least four years, and that after four years its before$-$tax salvage value will equal

$$50,000.$

$$ Last year, the company invested $$100,000$ to ensure that the new machine would work

seamlessly with the existing equipment.

$$ If the company goes ahead with the project, it will have an effect on the company's net

working capital. At the outset, T $=0,$ inventory will increase by $$40,000$ and accounts

payable will increase by $$20,000.$ At T $=4,$ the net working capital will be recovered after

the project is completed.

$$ The project is expected to generate revenue from sales of $$400,000$ the first year $($T $=1).$

After that, sales are expected to grow at a rate of $8\%$ per year.

$$ Operating costs that are expected to equal $30\%$ of sales revenue each year.

$$ The company's interest expense each year will be $$40,000.$

$$ Because of externalities, the new project is expected to decrease the after$-$tax cash flows of

the company's existing products by $$20,000$ a year $($T $=1,2,3,$ and $4)$ and this is considered

to be incremental to this particular project.

$$ The company's overall WACC is $8$ percent. However, the proposed project is more risky

than the average project, leading the firm to use a WACC of $10$ percent for this project.

$$ The company's tax rate is $20$ percent.

What information is not necessary when determining free cash flows? Why?

What free cash flows does this project generate?

Determine the NPV and IRR for this project.

Do you recommend for the company goes ahead with the expansion project? $($In Excel Please$)$