Amy Cola is considering launching a new soft drink product. Thebeverage will be sold in a variety of different flavors and will bemarketed to young children. In evaluating the proposed project, thecompany has the following information:

• The company estimates that the project will last for 4years.

• The company will need to purchase new machinery that has anup-front cost of $40 million (incurred at Year 0). The machinerywill be fully depreciated on a 4-year straight-line basis with nosalvage value.

• To gain more insight, Indiana had spent $1 million onmarketing research costs.

• Production of the new product will take place in a recentlyvacated facility that the company owns. It is currently empty andIndiana does not intend to lease the facility.

• The project will require a $2 million increase in netoperating working capital (NOWC) at Year 0. After Year 0, therewill be no changes in NOWC, until Year 4 when the project iscompleted, and the NOWC is fully recovered.

• The company estimates that sales of the new drink will be $27million each of the next four years.

• Operating costs (excluding depreciation) are expected to be$11 million each year.

• The company’s tax rate is 20%.

• The owners expect a return of 18% per year but the marketinterest rate charged by commercial banks are 5% per year.

Based on the information above, the company has estimated theproject’s free cash flows as shown in the table below and concludedthat it should pursue this business opportunity as it is expectedto generate a positive net present value (NPV).

years	0	1	2	3	4
machine investment	(40)
marketing research costs	(1)
net working capital	(2)
revenue		27	27	27	27
costs		(11)	(11)	(11)	(11)
pre-tax profit		16	16	16	16
tax (20%)		(3.2)	(3.2)	(3.2)	(3.2)
free cash flow	(97)	12.8	12.8	12.8	12.8
NPV @5%interest rate	2.39

Discuss whether the company has conducted the analysis correctlyand what the flaws are. Revise the cash flow estimation,re-calculate the net present value (NPV), the internal rate ofreturn (IRR), payback period and provide your recommendations.