A firm is considering a project that requires an initialinvestment of $55,000. The project is expected to generate revenuesof $80,000 per year for three years. Operating expenses will be 65%of revenues. The equipment will be depreciated on a straight-linebasis to a zero net salvage value. The equipment will have a lifeof 3 years. The project feasibility study, which was justcompleted, cost $35,000. The project requires an initial investmentin working capital of $5,000. Further investments in workingcapital 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 workingcapital made over t=0,1,2 will be completely recovered at the endof the project. The corporate tax rate is 30%. At t=3, the marketvalue of the equipment is expected to be $20,000, but the companydoes not plan to sell it. If the cost of capital is 10%, should theinvestment be undertaken? Â Â
