"One More Time" Computers Ltd (OMT) is examining the possibility of

manufacturing and selling a notebook computer which is capable of

receiving television signals and that can be operated from a remote

location.

First year selling price is $500 and it is expected to increase at a 20%

annual rate for the next two years, and then at a 10% annual rate for

the last two years.

Variable cash operating expenses are 60% of sales of the same year

and fixed cost per annum would be approximately $200,000.

Upfront investment in plant and equipment will total $ 2,000,000 which

will be depreciated on straight line basis over 8 year period (tax

deductible). The initial working capital investment will be $300,000.

The project has an expected life of five years. After 5 years, the market

value of project's assets would be around $400,000. Further, the

company will be able to recover full investment made in working capital

at the time of termination.

The sales department has provided the following forecast for the sales

during the next five years.

Year 1 2 3 4 5

Sales Units 5,000 6,000 6,500 5,000 4,000

In order to increase sales, the firm is considering an aggressive marketing

campaign. This campaign is expected to require an annual tax deductible

expense of $200,000 over next four years and with the campaign, annual

sales are expected to rise by 10% above the original projection made by

sales department. The Board of Directors has approved the marketing

campaign and this scenario will form the basis of all evaluations.

OMT's marginal tax rate is 25%. If taxable income on the project is

negative in any year, the loss will offset gains elsewhere in the

corporation, resulting in a tax savings.

Estimate the after-tax net cash flows for the project.