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Consider the following operating projections for a project that your company is considering investing in: 4 $4,500 5 $4,600 Select Operating Projections for Project X ($ in thousands) 0 1 2 3 Revenue $3,500 $4,000 $4,300 Production Costs Fixed Production Expense (excl depreciation) $1,000 $1,000 $1,000 Variable Production Costs $1,225 $1,400 $1,505 Depreciation $73 $76 $72 Total Production Costs $0 $2,298 $2,476 $2,577 Selling, General & Administrative $800 $500 $700 $500 Total Operating Expenses $800 $2,798 $3,176 $3,077 $1,000 $1,575 $75 $2,650 $400 $3,050 $1,000 $1,610 $76 $2,686 $600 $3,286 Net Working Capital Capital Expenditures $400 $1,200 $525 $150 $600 $160 $645 $140 $675 $225 $690 $160 You expect that after Year 5 the project's cash flows will grow at a steady growth rate of 2%. Assuming that the applicable tax rate is 21% and your required rate of return is 12%: Ow 4. Implementing this project will require software development. The company already has three software engineers working in IT, and plans on devoting them fully to this project for software development in Year 0. Since these engineers are already on the company's payroll, your junior financial analyst (intern) argues that their salaries should not considered as incremental to this project. Do you agree? Explain

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