You are in charge of analyzing a project. The project is for 4 years and is expected to generate sales of $350,000 during each of those four years. Cost of Goods Sold will initially be 40% of sales, but that number will reduce by 5% each subsequent year as efficiency increases (so, 35%, 30%, and 25%, in years 2-4 respectively). The project requires purchase of a machine that has a cost of $500,000 and will require an increase in NWC of $100,000. The machine can be depreciated as a MACRS three-year property class, but the change in NWC cannot. Upon completion of the project, the machine will be sold for $50,000 and you will be able to recover half of the change in NWC. The firm has a tax rate of 35% and required return on the project of 11%.
a. What are the NCFs for each of the four years? Year 1 Year 2 Year 3 Year 4
b. What is the Net Present Value of the project?