ZeeBancorp is considering the establishment of a contract collection service subsidiary that would provide collection services to small and medium$-$size firms. Compensation would be in the form of a percentage of the amount collected. For amounts collected up to $$100,$ the fee is $60$ percent of the amount collected. For amounts collected between $$100$ and $$500,$ the fee would be $40$ percent of the total amount collected on the account. For amounts collected over $$500,$ ZeeBancorp would receive $35$ percent of the total amount collected on the account.

ZeeBancorp expects to generate the following amount of business during the first year of operation of the new subsidiary:

Account class Number of collections Average amount collected for each account

Up to $$1004,500$ $$85$

Between $$100$ and $$5002,400$ $$350$

Over $$5001,500$ $$850$

Over the projected $10-$year life of this collection venture, the number of accounts in each group is expected to grow at $4$ percent per annum. The average amount collected from each account is expected to remain constant.

To establish the collection subsidiary, ZeeBancorp will have to rent office space at a cost of $$210,000$ for the first year. $($Assume the rent is payable at the end of each year.$)$ This amount is expected to grow at a rate of $11$ percent per year. Other operating expenses $($excluding depreciation$)$ are expected to total $$300,000$ during the first year and grow at an $11$ percent annual rate.

ZeeBancorp will have to invest $$130,000$ in net working capital if it undertakes this venture. In addition, required new equipment will cost $$240,000$ to purchase and an additional $$30,000$ to install. This equipment will be depreciated using the MACRS schedule for a $7-$year asset. The salvage value for the equipment is estimated to be $$50,000$ at the end of $10$ years.

The firm$$s marginal tax rate is estimated to be $35$ percent over the project$$s life, and its average tax rate is projected to be $30$ percent over the project$$s life. The firm requires a $15$ percent rate of return on projects of average risk. Use Table $9$A$-3$ for your calculations. Do not round intermediate calculations. Round your final answers to the nearest dollar.

Compute the net investment required to establish the collection subsidiary.

Compute the annual net cash flows over the $10-$year life of the project.