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a. A company producing plastic covers for magazines delivered by post decides to address the sustainability issue and decides to embrace a new strategy. First, the company makes a donation of 30,000 to a university research centre specialising in alternatives to plastic. Second, the company decides to move away from plastic and investigates possible alternatives for its own products. The consultant it hires, for a 7,000 fee, recommends switching to the production of a compostable material made of potato starch. The potatoes used would come from discarded potatoes from the food chain of some Northern European countries. The consultant also recommends expanding into new products using the same compostable bioplastic. Her proposal envisages the expansion of production in the market for compostable caddy liners and compostable food packaging. The latter would be sold in large rolls. The new production would last five years and requires purchasing, at the very beginning of the project, machinery for a total cost of 1.2m. Each caddy bag can be sold for 12p, each magazine cover for|20p and each large food packaging roll for 2.60. The estimated number of units that could be sold per year are calculated as 700,000 caddy liners, 500,000 magazine covers and 200,000 packaging rolls in the first two years. In each of the following three years, it is estimated that the units produced will be 15% higher than in Year 1. Variable costs per unit are 30% of the unit prices. Yearly fixed costs are 20,000 for caddy liners, 20,000 for magazine covers and 25,000 for the packaging rolls. The machinery is fully depreciated to zero over the life of the project using the straight-line depreciation method. The corporate tax rate is 19% and the discount rate required for this project is estimated to be 8%. (i) Calculate the yearly operating cash flows of the project using the information above. [25 marks]

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