Initial investment and depreciation: The new drink would be produced in an unused building (owned by AAA Health), which is fully depreciated. The new equipment required for the project would cost $500,000, plus an additional $50,000 for shipping and installation. With the new project, inventories would rise by $60,000, and accounts payable would increase by $10,000. All of these costs would be incurred at t = 0. The machinery will be depreciated under the Modified Accelerated Cost Recovery System (MACRS) as 3-year property. The depreciation rates are 33% at t = 1, 45% at t = 2, 15% at t = 3, and 7% at t = 4. • Project life and salvage value: AAA Health expects to run the project for four years. The cash inflows are assumed to begin one year after the project is undertaken, or at t = 1, and to continue to t = 4. At the end of the project’s life (t = 4), the equipment is expected to have a salvage value of $50,000. Also, the firm will recover the net working capital at the end of the project life. • Sales and operating costs: Unit sales are expected to total 50,000 bottles per year, and the expected sale price is $10 per bottle. Cash operating expenses for the project (total operating costs excluding depreciation) are expected to amount to 40 percent of sales revenue. • Tax rate: AAA’s marginal tax rate is 30 percent.

Assume that there is no alternative use for the building that will be used for the project. 6. Estimate the total amount of the initial investment outlays at t = 0. Hint: Shipping and installation cost and investment in net working capital (= current assets minus current liabilities) should be considered in the initial investment estimation. 7. Calculate annual sales for Year 1 to Year 4. 8. Calculate annual cash operating expenses for Year 1 to Year 4. 9. Calculate annual depreciation amount for Year 1 to Year 4. Hint: The depreciation basis includes the new equipment cost and shipping and installation cost. 10. Estimate annual operating income before taxes for Year 1 to Year 4. 11. Estimate annual operating income after taxes for Year 1 to Year 4. 12. Estimate annual after-tax operating cash flow for Year 1 to Year 4. 13. Calculate the after-tax salvage value of the equipment. 14. Estimate the total terminal year after-tax non-operating cash flow. 15. Estimate the annual total after-tax cash flow for Year 0 to Year 4.