Reference no: EM132442043

Problem: The management of "Good Firm (GF)" is considering investing in a new project P. Project P requires an initial investment of £600,000 and has an overall life of 6 years. The sales revenues of project P are £150,000 in year 1, then sales revenues are expected to increase by 10 per cent per year in each year. For each year, from 1 to 6, the operating costs are 25 per cent of the sales revenues. The changes in net working capital are £12,000 in year 0, £5,000 in year 1, £3,000 in year 2, -£3,000 (minus sign) in year 3, £1,000 in year 4, 0 in year 5, and all net working capital is recovered at the end of the project's life. The initial investment is depreciated according to the straightline depreciation method. The investment is sold at its residual value of £120,000 after depreciation at the end of the 6 years. Firm "GF" is in the 30 per cent marginal tax bracket and has a cost of capital of 15 per cent. 

Required:

Question 1: Calculate the Net Income (NI) of project P in each year, from year 1 to year 5.

Question 2: Calculate the Net Cash Flows (NCF) of project P in each year, from year 0 to year 5.  

Question 3: Calculate the Net Present Value (NPV) of project P at the discount rate of 15 per cent. Should the project be accepted according to the NPV method?