Hurley's Winery is planning to acquire a new grape masher. The masher will cost $100,000 including shipping and installation and will be depreciated as a 7-year MACRS asset.

At the time the masher is purchased, Hurley will have to invest $5,000 in net working capital. Additional investments in net working capital are required at the end of year 1 ($3,000) and year 2 ($2,000). Net revenues attributable to the masher are expected to total $25,000 during year 1 and to grow by 5 percent per annum through the end of year 6.

After that time, revenues are expected to decline by 10 percent per annum. Annual year 1 cash operating expenses are expected to total $10,000 and to grow at an annual rate of 10 percent per annum. Hurley expects to sell the masher at one second after midnight on the first day of year 8 for $10,000. The marginal tax rate for Hurley is 40 percent for ordinary income and 28 percent for capital gains.

(Hint: See Appendix 9A for information on MACRS depreciation.)

Compute the expected net cash flows for year 7. Include in your year 7 calculations the proceeds from the salvage value of the masher and recovery of net working capital at the beginning of year 8. For the purposes of present value calculations, you may assume that the end of year 7 is the same as the beginning of year 8.