Reference no: EM132966989

Problem 1: A firm is considering a project that requires an initial investment of $55,000. The project is expected to generate revenues of $80,000 per year for three years. Operating expenses will be 65% of revenues. The equipment will be depreciated on a straight-line basis to a zero net salvage value. The equipment will have a life of 3 years. The project feasibility study, which was just completed, cost $35,000. The project requires an initial investment in working capital of $5,000. Further investments in working capital will be needed as follows: an additional $3,000 at t=1 and $2,500 at t=2. It is assumed that all of the investments in working capital made over t=0,1,2 will be completely recovered at the end of the project. The corporate tax rate is 30%. At t=3, the market value of the equipment is expected to be $20,000, but the company does not plan to sell it. If the cost of capital is 10%, should the investment be undertaken?