The BASF Corporation is considering the production of a new carbon material to be used in the manufacturing of wide-body aircraft. To produce this material, an investment of $4 million in plant and equipment is required. The firm estimates the investment will have a five-year life, using straightline depreciation toward a zero salvage value. However, the investment has an anticipated market salvage value at the end of the projects life equal to 10% of its original cost. The projected sales volume during the projects life is as follows (in millions of pounds): 1, 1.5, 3, 3.5, and 2. To operate the new plant, BASF estimates that it will incur additional fixed operating expenses of $1 million per year and variable operating expenses equal to 45% of revenues. Furthermore, BASF estimates that it will need to invest 10% of the anticipated increase in revenues each year in net working capital. The price per pound of the new carbon material is expected to be $2 in years 1 and 2, then $2.50 in years 3 through 5. BASFs marginal tax rate is 38%. The company requires a minimum return of 15% in projects of similar risk.

a) Derive the projects free cash flows to the firm for each year of the proposed investment (including the initial investment outlay).

b) Using the NPV investment decision rule, does this project create value for BASF? If so, how much?