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A gadget production factory will cost $1.2million. It is expected to last four years. Depreciation is toward a $200,000 salvage value, which are recovered in the fourth year. For depreciation use the three years MACRS (below). Sales are expected to be $1.2 million with 50% cost of goods sold and $200,000 annual fixed cost in the operating years. Assuming 15% discount rate and 20% tax rate: a. Should the firm accept the project? b. The project will require a working capital commitment of $180,000 in the initial year. Evaluate the project net present value, should the firm accept the project?.

* 3 Year MACRS Year 1 2 3 4

Allowance 33 44 15 8