Hayward Enterprises, a successful imaging products firm, is considering expanding into the lucrative laser-engraved self-portrait business. It is expected that this new business will generate first-year revenues of $2 million. These revenues are expected to grow at 10 percent per year for the next eight years.
Year 1 incremental operating costs of this new business are expected to total $800,000 and to grow at 6 percent per year for the next eight years. The firm's marginal tax rate is 40 percent, but its average tax rate is only 35 percent. Depreciation expenses are expected to be $100,000 during year 1, $200,000 during year 2, and $150,000 during year 3. Capital outlays required at time 0 total $2 million, and another $500,000 will be required at the end of year 1.
Net working capital investments of $50,000, $75,000, and $85,000 are expected at the end of years 1, 2, and 3 respectively. Calculate the expected net cash flows for year 3.