A firm is considering introducing a new product. It forecasts incremental an- nual gross profits (sales minus costs) from the product of $91,250, $106,750, and $114,250 for the next three years, respectively.

The project requires the purchase of a factory for $108,500, which would be straight-line depreciated over its 6-year tax life. It is estimated that the factory can be sold for $44,500 at the end of the three-year life of the project. Starting the project requires an initial net working capital investment of $21,000, with further annual increases of $5,750 during the life of the project. All net working capital is fully recoverable at cost when the project terminates. The firm pays tax at a marginal rate of 25% and the appropriate cost of capital for the project is 12.9% per annum.

The projected Free Cash Flow is closest to _________ at the end of Year 2 and closest to _________ at the end of Year 3.

a. $78,833; $122,708

b. $60,750; $151,562

c. $60,750; $131,396

d. $78,833; $169,646

e. $84,583; $175,396