Think Tree has an investment opportunity to produce a new gadget. The required investment on 1 January of this year is $28 million. The firm will depreciate the investment to zero using the straight-line method over 4 years. The investment has no resale value after completion of the project. The firm is in the 34 per cent tax bracket. The price of the product will be $400 per unit, in real terms, and will decrease by 2% per year in real terms over the life of the project. Labour costs for year 1 will be $15.30 per hour, in real terms, and will increase at 2 per cent per year in real terms. Energy costs for year 1 will be $5.15 per physical unit, in real terms, and will increase at five per cent per year in real terms. The inflation rate is 5 per cent per year. The project also requires net working capital of 10% of the annual revenues level. Revenues are received and costs are paid at year-end. Refer to the following table for the production schedule:

Year 1

Year 2

Year 3

Year 4

Physical production, in units

100,000

200,000

200,000

150,000

Labour input, in hours

2,000,000

2,000,000

2,000,000

2,000,000

Energy input, physical units

200,000

200,000

200,000

200,000

The real discount rate for Think Tree is 8 per cent.