Answer:
Explanation: please refer to the explanation section
Initial fixed asset Investment = 2.33million = 2 330 000
Modified Accelerated Cost recovery System
The Fixed Asset Falls under the 3 year MACRS class the project the asset which states that Asset Depreciation range Midpoint is 4 years or less The period for this project is 3 years
Estimated annual sales = $1735000
costs = $640,000
Initial Net working Capital investment = $300,000
Residual Value (Value of the fixed asset at the end) = $255,000
a. Projected Cash flows
Year 0
Cash outflows = 2 330 000 - 300 000 - 255 000 = 2375000
year 1 year 2 year 3
Estimated sales 1735000 1735000 1735000
costs -640000 -640000 -640000
Depreciation -791666.67 -791666.67 -791666.67
Residual Value<u> 255000
</u>
Net sales 303333.33 303333.33 558333.33
Tax 25% -<u>75833.33 -75833.33 -139583.33</u>
Net Cash flows <u>227500 227500 418750</u>
Depreciation = (2330 00 + 300 000 -255000)/3= 791666.67
Tax = Net sales x 25%
b Net Present Value (Required rate Return = 9%)
PV = 227500/(1+0.09)^1 + 227500/(1 + 0.09)^2 + 418750/(1+0.09)^3
Present Value of cash flows = 723549.63
Net Present Value = 723549.63 - 2630 000 = -1906450.37
The net present Value is Negative indicating the project will not bring positive returns
