Produce a free cash flow model of the following project for the purpose of carrying out a discounted cash flow analysis of the project and calculate the NPV.

Smoke Fire Protection (SFP) specialises in designing and manufacturing fire detectors and alarms in the UK. Recently, the firm has focussed on a development of a new technology that will improve the quality and price of their product. The costs to complete the final stages of regulatory approval are estimated to be 4m (regulatory investment is tax deductible). The new generation of smoke detectors is expected to have a production life of six years.

The new generation of smoke detectors will require a new factory unit, which will be built on a vacant site near Milton Keynes. The site was recently valued at 10m, but the company already owns it (ignore any tax implications of selling the site). SFP would need to invest 32m to build the new factory and acquire the required plant and equipment. SFP charges depreciation on a straight-line basis over the useful life of assets. The plant and equipment is not expected to have any scrap value at the end of the project. The project will also require additional working capital of 12m for the life of the project. It is expected that 70% of the working capital investment will be recovered at the end of the project.

Currently, net investment in plant and equipment is eligible for capital allowances on a straight-line basis over four years. The applicable corporation tax rate is 30%. Capital allowances are received by SFP in the same year that they are claimed but taxes on profits are paid one year in arrears. You may ignore any taxes relating to any disposal of the property.

SFP expects to sell a total of 800,000 of the smoke detectors each year at a fixed price of 60 per kit over the planned production life of six years. Incremental operating costs for SFP are estimated to be 30m per annum. All cash flows are in today's money and inflation is expected to be 2% per annum over the next six years.