a: The initial outlay = Purchase price+ installation cost+ increase in working capital
= 100,000+ 5000+ 20,000
= 125000
b : annual depreciation= (Purchase price+ installation cost)/Useful life
= (100000+5000)/10 = 10500
after-tax cash flows in years 1 to 9= (EBIT)*(1-tax rate)+ Depreciation
= (85000)*(1-35%)+10500
= 65750
c terminal cash flow in year 10= operating cash flow+ working capital recovery
= 65750+20000
= 85750
D: net present value= initial outlay + present value of after-tax cash flows from years 1-9+ present value of terminal cash flow
= -125000+65750*(1-1/(1+11%)^9)/ 11% + 85750/1.11^10
= 269260.69
The project should be undertaken since net present value is positive.
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