FCFs: Build a table to calculate the expected free cash flows of the new project.

Specific Foods (SF) is considering undertaking an expansion of its existing operations to produce a new product. The new project is in the same line of business as existing operations, and it is expected to generate revenue over a period of 5 years. The company plans to sell 5,000 units each year starting in year 1 (until year 5) and to charge $300 per unit. Annual costs of production are expected to be 70% of revenue the first year, 60% the second year, and then stabilize at 50% of sales for the remainder of the project. The new project will require an immediate investment of $300,000 in net working capital. This net working capital is then expected to remain at that level for 2 years but will have to be increased by an additional $200,000 in year 3. Net working capital is then expected to remain at that elevated level through the remaining life of the project and be recovered when the project shuts down. SF has just discontinued another food product. Some of the office supplies, such as desks and file cabinets, are expected to be used in the office of the new project. Alternatively, these office supplies would be sold off immediately for $200,000 after tax. SF contracted with a consulting firm a year ago to analyze the market potential of the new project. Their report has been completed and the $500,000 fee for the report has just been paid. The project also requires an immediate $1.5 million investment in a new machine, which should be fully depreciated over 5 years to zero using straight-line depreciation. SF is expected to sell the new machine in year 5 for $700,000. SF pays a 21% marginal corporate tax rate.