1. Free Cash Flows (FCFs) for Each Project: Project A: Initial Outlay: $150 million Additional Revenues: $45 million per year for 10 years Additional Working Capital Expense: $1 million (immediately recoverable) Operating Costs: 20% of revenues Depreciation: Straight-line over 10 years Salvage Value: $25 million 1.1. Calculate Operating Cash Flows (OCF) for each year: = Revenues − Operating Costs − Depreciation OCF=Revenues−Operating Costs−Depreciation = $ 45 M − ( 0.20 × $ 45 M ) − ( $ 150 M 10 ) OCF=$45M−(0.20×$45M)−( 10 $150M ​ ) = $ 45 M − $ 9 M − $ 15 M OCF=$45M−$9M−$15M = $ 21 M OCF=$21M 1.2. Calculate Free Cash Flows (FCF) for each year: = − Additional Working Capital Expense FCF=OCF−Additional Working Capital Expense = $ 21 M − $ 1 M FCF=$21M−$1M = $ 20 M FCF=$20M Year 1 to 10 FCFs for Project A = $ 20 M Year 1 to 10 FCFs for Project A=$20M Project B: Initial Outlay: $85 million Additional Revenues: $25 million per year for 10 years Additional Working Capital Expense: $2 million (immediately recoverable) Operating Costs: 20% of revenues Depreciation: Straight-line over 10 years Salvage Value: $10 million 2.1. Calculate Operating Cash Flows (OCF) for each year: = $ 25 M − ( 0.20 × $ 25 M ) − ( $ 85 M 10 ) OCF=$25M−(0.20×$25M)−( 10 $85M ​ ) = $ 25 M − $ 5 M − $ 8.5 M OCF=$25M−$5M−$8.5M = $ 11.5 M OCF=$11.5M 2.2. Calculate Free Cash Flows (FCF) for each year: = − Additional Working Capital Expense FCF=OCF−Additional Working Capital Expense = $ 11.5 M − $ 2 M FCF=$11.5M−$2M = $ 9.5 M FCF=$9.5M Year 1 to 10 FCFs for Project B = $ 9.5 M Year 1 to 10 FCFs for Project B=$9.5M