Artificial Limb, Inc. is looking at a new production system with an installed cost of $6 million. This cost will be depreciated straight-line to zero over the projects three-year life. At the end of year 3, the new system can be sold for $1 million. Annual revenues from the machine, net of maintenance costs, are $4 million per year (pre-tax). The system requires an initial investment in net working capital of $100,000, which must be maintained for the three years. The tax rate is 40% and the discount rate is 10%.

There are four types of cash flows on this project:

1) Per-year operating cash flows (after-tax, including depreciation tax shield)

2) a) The initial (time 0) investment cost

2) b) The systems after-tax salvage value (at time 3)

3) Changes to working capital

All cash flows need to be after-tax.

Part a. What are the per-year after-tax operating cash flows (including the depreciation tax shield)? (Hint: This is the OCF Equation (1).)

Part b. The initial investment cash flow is:

Part c. The time 3 after-tax salvage cash flow is

Part d,

i. In this and the next question, please indicate the cash flows associated with the change in net working capital for each of the four times (time 0, 1, 2, and 3) of the project's life. Please indicate cash outflows with a negative sign (-) and inflows with a positive (no + or -), and express them in $millions as x.x -- for example, $1 million is 1.0 and $500,000 is 0.5.

ii. Again please indicate the cash flows associated with the change in net working capital for the two remaining times (times 2 and 3) of the project's life. Please indicate cash outflows with a negative sign (-) and inflows with a positive (no + or -), and express them in $millions as x.x -- for example, $1 million is 1.0 and $500,000 is 0.5.