Keene Inc. is about to undertake a major investment project. The project will require an initial investment of $4.2 million in a machine plus initial $0.8 million for working capital. Tax authorities will allow the company to depreciate the machine on a straight-line basis over three years to a salvage value of zero. In fact, however, you expect that you can sell the machine for $130,000 at the end of Year 3. You will need to have a working capital balance on hand at the end of each year equal to 20% of that years sales. The working capital can be fully recovered at the end of the projects life. You expect that the project will generate $4million in sales and $1.2 million in cash operating expenses (excluding depreciation) during each of the next three years. The corporate tax rate is 40%. The cost of capital is 10%.

1. Calculate (total) free cash flow at year 0.

2. Calculate (total) free cash flow at year 1.

3. Calculate (total) free cash flow at year 2.

4. Calculate (total) free cash flow at year 3.