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Question - Fegan Fabrics Company is considering the purchase of a new knitting machine that will presumably allow them to create a new line of sweaters. The new knitting machine costs $150,000 and is expected to last for five years. With this machine, Fegan believes that revenues will increase by $90,000 per year and operating expenses will increase as well by $20,000. When the project is complete, the company plans to throw away the machine as presumably new technology will take its place making it obsolete. Fegan uses straight line depreciation down to zero salvage value when depreciating assets. The company will need to make an immediate investment in inventory and receivables, totaling $10,000 and $5,000 respectively. The tax rate for the firm is 20%.
a) Calculate all cash flows for the firm - starting with Year 0 and ending with Year 5.
b) What is the NPV of the project given that the company's cost of capital is 12%?
c) Based on your result in part b, is this a good project? Why or why not?
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