ABC company is considering a new project that requires an initial fixed asset investment of $400,000. The project has a life of 4 years. The fixed asset will be depreciated straight-line to zero over its 4 year tax life, after which time it will have a market value of $12,500. The project requires an initial investment in net working capital of $20,000, all of which will be recovered at the end of the project. The project is estimated to generate $350,000 in annual sales, with annual costs of $200,000. The tax rate is 20 percent and the required return for the project is 15 percent.

(a)      Operating cash Flow

(1) What is the annual depreciation of the fixed asset?

(2) What is the annual net income of the project?

(3) What is the operating cash flow per year of the project?

(b)      Net present value

(1)       What is the initial investment of the project including change in capital spending and change in net working capital at time t=0 (CF₀)?

(2)       What is after-tax salvage value of the fixed asset at the end of the project (end of t=4)?

(3)       What is the cash flow recovered from working capital requirement at end of the project (end of t=4)?

(4)       What is the net present value of this project?

(5)       Should the firm accept this project? Briefly explain your answer in one sentence.

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