GPS World S.A.L. is a medium size company located on the outskirts of Beirut. Under the general manager Majid Al Hamli, GPS World has grown from a local electronics retail store to one of Lebanons leading manufacturers and distributor of navigation equipment in only five years. Today, Majid is meeting with the companys head of marketing, Omar Al Mansoor, to discuss the development of a new product, the Map100, a new generation GPS system with a detailed Middle East road and sea area coverage for driving, boating, or plain walking applications. The new interface of the Map100 allows for an automatic update of the road system and the areas general infrastructure without the inconvenience of a manual download of new maps. Omars department has conducted extensive market research to gauge potential demand for the new product and to sense the amount of money potential customers are likely to pay for the Map100 features. Based on these findings, Omar and his team are convinced that at a price of LP202,500 ($135) per unit 15,000 Map100s could be sold in the first year. With an aggressive marketing campaign, second year sales could be boosted to 16,000 units. Unfortunately, barriers to entry are quite low and new rivals are expected to increase product supply significantly. As a result, sales are likely to go down by 500 units in years 3 and 4 after which the annual sales decrease accelerates to 1,000 units. The resulting revenue reduction is amplified by an annual unit price decrease of 3 percent after year 2. Variable costs per unit are LP70,500 ($47) for the first year and estimated to increase by 4 percent per year. First year annual fixed costs are set at LP600 million ($400,000) but are likely to go up by LP15 million ($10,000) per year. The recommended investment period is only 6 years, mainly because of the anticipated reduction in profit margins as a result of a combination of heightened competition and inflationary pressure. The initial investment of LP3.6 billion ($2.4m) for the production equipment, will be depreciated according to the 7- year asset class MACRS schedule. With the launch of the project, an immediate net working capital investment of LP337.5m ($225,000) will be required. As the financial analyst of the company, Majid has asked you to join the meeting. Based on your estimate of GPS Worlds cost of capital of 11.5 percent, you perform the following tasks:

1. Generate pro-forma income statements for years 1-6 and determine the resulting annual operating cash flows. Assume a corporate tax rate of 15 percent.