3D Productions is considering a new packaging design for the virtual reality goggles the company produces. Management estimates that the new design will result in the following probabilities for possible effects on the firm's current estimate of annual sales of $8 million: Probability .05 .20 .40 .20 .15 Change in Sales ( 30,000) 40,000 100,000 150,000 250,000 The machinery required to incorporate the new design in the packaging is priced at $600,000. Since the new machine is technically superior to the current machine, it is expected to decrease packaging materials costs from 15% of revenues to only 12%. The life of the machine is estimated to be only three years and it would be depreciated using the MACRS depreciation method for 3-year assets (33%, 45%, 15%, 7%). The new machine is expected to have a salvage value of only $100,000 after three years. The old machine was purchased one year ago for $400,000 and is also being depreciated using the MACRS method for 3-year assets. Although it has a resale value of $250,000 currently, the estimated salvage value at the end of its remaining three years of expected useful life is only $60,000. The expected change in sales is anticipated to require an initial $100,000 in additional working capital. Any working capital requirements will be recovered at the end of three years. The company is in the 40% tax bracket. What are the relevant cash flows for investment evaluation purposes?

Expected change in sales = $114,000 per year

Year 0 Year 1 Year 2 Year 3

Net Cash Flows (442,800) 211,392 288,192 369,792