ABC Ltd. is analyzing the possibility of introducing a new product. ABC Ltd. estimates that developing this product will require up-front capital expenditures of $10 million. These costs will be depreciated on a straight-line basis for five years. ABC Ltd. believes that it can sell the product initially for $260. The selling price will increase to $270 in years 2 and 3 before falling to $255 and $245 in years 4 and 5, respectively. After five years the company will withdraw the product from the market and replace it with something else. Variable costs are $140 per unit. ABC Ltd. forecasts sales volume of 20,000 units the first year, with subsequent increases of 25 percent (year 2), 20 percent (year 3), 20 percent (year 4), and 15 percent (year 5). Offering this product will force ABC Ltd. to make additional investments in receivables and inventory. Projected end-of-year balances appear in the following table. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Accounts receivable $0 $200,000 $250,000 $300,000 $150,000 $0 Inventory 0 500,000 650,000 780,000 600,000 0 The firm faces a tax rate of 40 percent. Assume that cash flows arrive at the end of each year, except for the initial $10 million outlay.

Required:

a. Calculate the project's contribution to net income each year.

b. Calculate the project's cash flows each year.

c. Calculate two NPVs, one using a 10 percent discount rate and one using a 15 percent discount rate.