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You are considering replacing an old machine with a new one. The new machine costs $10K. It has an economic life of 3 years. If you keep the old machine, it is also expected to last 3 years. The new machine will be depreciated straight-line with a salvage value at the end of its life of $2.5K. It will also lead to an increase in output of 2K units per year with each unit expected to be sold at $1.25. Further, variable manufacturing costs are expected to decrease by $0.25/unit with the new machine’s efficiency bringing variable costs to $0.50/unit for all 10K units (8K plus the expected increase of 2K). With the increased output, the new machine requires an immediate increase in net working capital of $250. The old machine has a market value of $2K and a book value of $0. The new machine is expected to be sold for $2.5K after 3 years. The company has a WACC of 15% and a marginal tax rate of 25%.

1) Calculate the free cash flows associated with this project?

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