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A manager at a consumer electronics firm is considering a $5-$year project to improve its packaging

process for cables and other accessories and reduce waste. The project requires a temporary product

line to be set up in a warehouse that is currently rented out to a local distributor. The manager has

collected the following information on the project:

$$ The project requires an immediate investment of $$300,000$ in new equipment. The equipment

will have a $10-$year economic life and will be depreciated straight$-$line to a salvage value of

zero. After $5$ years, the equipment can be sold for $$100,000.$

$$ The production line is expected to produce revenues of $$600,000$ per year $($starting in year $1)$

and its operating cash costs are expected to be $$270,000$ per year.

$$ The rent the firm receives on its warehouse equals $$150,000$ per year. The current book value of

the warehouse is $$500,000$ and the annual depreciation amount equals $$10,000.$ The firm plans

to sell the warehouse at the end of year $5$ for $$450,000,$ irrespective of whether the project will

be undertaken.

$$ Operating the product line will require an immediate investment of $$100,000$ in Net Working

Capital. The level of NWC will remain constant for the duration of the project.

$$ Since the project reduces waste, the firm can claim an immediate one$-$time tax credit of $$20,000$

if it sets up the product line.

The manager has estimated that the relevant cost of capital for an investment of this type equals

$12\%.$ The marginal corporate tax rate for the electronics firm is $40\%.$ Furthermore, you can assume

that all cash flows are realized at the end of the year. Should the manager go ahead with the

investment project? Show your calculations $($hint: set up a cash flow template and first work out the

Free Cash Flows of the project, and then calculate the project$$s NPV and IRR$).$

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