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 straight-line depreciation toward a zero salvage value. However, the investment has an anticipated market salvage value at the end of the project’s life equal to 10% of its original cost. The projected sales volume during the project’s 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. BASF’s marginal tax rate is 38%. The company requires a minimum return of 15% in projects of similar risk. Required:
Derive the project’s free cash flows to the firm for each year of the proposed investment (including the initial investment outlay).