NorthVan Ltd. is currently considering a proposal to start a new line of business. To evaluate the proposal, NorthVan will use a four-year planning horizon, which coincides with the projected useful life of the equipment required for the new business. NorthVans tax rate is 25% and its cost of capital is 14%. To start the business, NorthVan will have to spend $10 million on new equipment. Management estimates that the equipment will have a salvage value of $1.25 million at the end of its useful life. The new equipment qualifies as Class 8 equipment for income tax purposes, with the applicable capital cost allowance (CCA) rate of 20% declining balance, and it is eligible for the Accelerated Investment Incentive (AII) of 1.5 times the CCA rate in the year of acquisition. Assume there are still assets remaining in the undepreciated capital cost (UCC) class and that there is a positive balance in the class even after the salvage proceeds are deducted. NorthVan intends to run the new business using half of the building out of which it is currently operating. The space for the new business is currently unused, it cannot be sold or rented, and there is no foreseen use of this space for alternative purposes. Costs associated with the use and maintenance of the building have been stable at $500,000 per year over the past several years, but they are expected to increase to $700,000 with the new business. The new business will also require an additional investment in net working capital of $100,000.

As a part of its business plan, management has generated the following projected annual income statements for the new business:

Year 1 Year 2 Years 3 and 4

Revenues $10,000,000 $12,500,000 $14,000,000

Cost of goods sold (6,000,000) (7,500,000) (8,400,000)

Depreciation (2,850,000) (2,350,000) (1,200,000)

Earnings befor interest & taxes $ 1,150,000 $ 2,650,000 $ 4,400,000

Required: Identify and calculate the relevant cash flows to be used in a capital budgeting analysis on an after-tax basis. Also identify any cash flows that might not be relevant and explain why?