Delos Ltd is considering purchasing new AI supercomputers. The new servers are expected to generate additional revenue of $1,400,000 every year in the four years (t=1, 2, 3, and 4). Each year the operating costs (not including depreciation) are expected to be 50 percent of sales revenue. The new servers have an up-front cost (t=0) of $2,000,000. The servers are expected to have a four-year life, and will be fully depreciated on a straight-line basis over four years. The company anticipates that after four years, the salvage value will be $200,000. If Delos goes ahead with the proposed product, it will have an effect on Deloss net working capital. At the outset, t = 0, net working capital will increase by $100,000. At t = 4, the net operating working capital will be recovered after the project is completed. To fund the project, Delos will have to borrow $1,000,000 at 6% annual interest rate from the bank and will pay additional annual interest payment of $600,000 starting from year 1. Cost of capital is estimated to be 12 percent per annum. The corporate tax rate is 40 percent.

a. Calculate the projects free cash flows in year 0 and show your calculations. (1 mark)

b. Calculate the projects free cash flows from years 1 to 3 and show your calculations. (3 marks)

c. Calculate the projects free cash flows from year 4 and show your calculations. (2 marks)

d. What is the Net Present Value (NPV) of this project (round to 2 decimal places)? Is it worthwhile to buy the new AI supercomputers? Explain your answer. (2 marks)