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Solution: Computation of cash flows: (All figures in $) Year 0 Year 1 Year 2 Year 3 Cash Outflows: Initial Investment -2820000 Net Working Capital -340000 Cash Inflows: Annual Sales 2120000 2120000 2120000 Less: Costs -815000 -815000 -815000 Less: Depreciation -863333. 3333 -863333. 3333 -863333. 3333 Profit before tax 441666. 6667 441666. 6667 441666. 6667 Less: taxes@30% -132500 -132500 -132500 Profit after taxes 309166. 6667 309166. 6667 309166. 6667 Add: Depreciation 863333. 3333 863333. 3333 863333. 3333 Cash flows after taxes 1172500 1172500 1172500 Add: recovery of net working capital and salvage value 570000 Total cash flows -3160000 1172500 1172500 1742500 Hence, Cash outflows for Year 0 $(3,160,000) Cash outflows for Year 1 $1,172,500 Cash outflows for Year 2 $1,172,500 Cash outflows for Year 3 $1,742,500 Workings: * Depreciation each Year =( Cost - Salvage value)/Life * Depreciation each Year =( 2820000-230000)/3 years * Depreciation each Year 863333. 3333