The firm uses free cash flow discounted by the cost of capital. The firm has the following information:

The up-front cost of the facility at time = 0 is $10 million. The facility will be depreciated using MACRS. (with the depreciation percentages as follows: 20.00% in year 1, 32.00% in year 2, 19,20% in year 3, 11.52% in year 4, 11.52% in year 5, 5.76% in year 6).

The company will operate the facility for 5 years. It can be sold for $3 million at time =5.

(Since the company will sell the facility at the end of year 5, how do we treat the depreciation for year 6?)

Interest expense will increase by $50,000/year with this project.

The firm spent $750,000 on a feasibility study a year and a half ago. The study concluded that opening a new facility would be profitable.

If the facility is opened, the firm will need additional inventory at time=0 of $2 million. Accounts payable will increase by $1 million at time =0. All working capital will be recovered at time =5.

If the facility is opened, it will increase sales by $7 million/year in year 1 and costs will increase by $3 million/year. The tax rate is 40%.

If the project is not done, the land on which the facility would be built will be sold for $5 million (after tax) immediately.

Compute the initial cost, net working capital, and opportunity cost cash flows for years 0, 1, 5.