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Lawton Enterprises is evaluating a project with the following characteristics:

Fixed capital investment is $$2,000,000$

The project has an expected $6-$year life

The initial investment in working capital is $$200,000.$ At the end of each year, working capital must be increased so that the cumulative investment in net working capital is one$-$sixth the next year's projected sales.

The Fixed capital is depreciated $30$ percent in year $1,35$ percent in year $2,20$ percent in year $3,10$ percent in year $4,5$ percent in year $5,$ and $0$ percent in year $6.$

Sales are $$1,200,000$ in year $1.$ They grow at a $25$ percent annual rate for next two years, and then grow at a $10$ percent annual rate for the last three years.

Fixed cash operating expenses at $$150,000$ for years $1-3$ and $$130,000$ for years $4-6.$

Variable cash operating expenses are $40$ percent of sales in year $1,39$ percent of sales in year $2,$ and $38$ percent of sales in years $3-6.$

Lawton's marginal tax rate is $30$ percent.

Lawton will sell its fixed capital investments for $$150,000$ when the project terminates and recapture its cumulative investment in net working capital. Income taxes will be paid on any gains.

The project's required rate of return is $12$ percent.

If taxable income on the project is negative in any year, the loss will offset gains elsewhere in the corporation, resulting in a tax savings.

a$.$ Determine if this is a profitable investment using NP$1$ and IRR

b$.$ If the tax rate increases to $40$ percent and the required rate of return increases to $14$ percent, is the project still profitable?

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