Answer Happy

2. Specific Investment Decisions [25 Marks] Revenues generated by a new project are forecast as follows: Year Revenues (£) 1 40,000 2 30,000 3 20,000 4 10,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The new project requires an immediate investment of £45,000 in plant and equipment. ECO-20051 Finance 2 3/6 a) The company has already spent £3,000 on Research and Development (R&D). Should the cost of £3,000 be included in the project evaluation? Explain your answer. [5 Marks] b) If the plant and equipment are depreciated over 4 years to a disposable value of zero using straight-line depreciation, and the firm's tax rate is 40%. Calculate the depreciation tax shield and operating cash flow in each year. [6 Marks] c) Explain how changes in working capital affect project cash flows and calculate the cash flow from changes in working capital in each year. [6 Marks] d) Assume the opportunity cost of capital is 12%. Calculate the project NPV and explain whether the company should accept the project. [8 Marks]