SteelTech will purchase new equipment for $1,500,000. The additional micro-processors will be manufactured in a
building SteelTech purchased eight years ago for $4,200,000. The building will be retooled for the new project at a cost of $500,000, which includes building permit fees of $25,000.
The purchased equipment will be depreciated using Modified Accelerated Cost Recovery System (MACRS) depreciation schedule (see below), and sold for $250,000 in year 5. The projected revenue for year 1 is $550,000. Subsequent year's revenues will increase by eight percent of the preceding year's revenues (i.e., year 2 revenues equals 1.08 *$550,000). This expansion project will result in an annual loss of revenues from an existing manufacturing operation of $100,000. Operating expenses (excluding depreciation and amortization) is estimated at 20 percent of net revenues. Operating net working capital will rise by $250,000 and $300,000 in years 1 and 2, respectively. This investment in operating net working capital fully reverses in the final year of the project. Annual interest expense is fixed at $35,000.
Year 1: 33.33%
Year 2: 44.45%
Tax Rate: 40%
What is the project's Free Cash Flows (FCF) for years 1 and 2? (Note: Do not subtract interest expenses when computing FCF)
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