The Patrick Lynn Corporation that sells Golden Chicken Nuggets has come up with a new recipe to make bigger and better-tasting nuggets. In order to produce them, the company needs to replace an existing old machine with a new one that costs $300,000 (including shipping and installation). The old machine has been fully depreciated and the new one would be depreciated on a straight-line basis over its estimated useful life of 5 years. If the decision is made to go ahead with the project the old machine will be sold for $60,000. Annual revenues (sales) are expected to be $320,000, operating costs (including COGS but excluding depreciation) $100,000. The operating profits (EBIT) from the old machine are $15,000 per year. The company estimates the actual productive life of the project at 3 years, after which the machine would be sold for a salvage value of $160,000. The initial net working capital needed for the expanded operations are estimated at $45,000. No changes in NWC are expected for the remaining years until the termination of the project in year 10. The way the company made all these estimates is by conducting a technical and economic feasibility study that cost $50,000. It also cost $35,000 to develop and market-test the new nuggets. The companys marginal tax rate is 40%. The company finances its capital with 35% debt in the form of bonds whose YTM is 9% and 65% common equity. The market return is 14%, the risk-free rate is 3%, and the beta of the common equity is 1.70.

1.Calculate the relevant annual free cash flows for years one and two

2. Calculate the expected after-tax salvage value of the new machine when the time comes for it to be sold (end of year three).

3.Calculate the total relevant cash flows at the end of year three