Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of...
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Accounting
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:
Expected annual revenues: $750,000
Projected product life cycle: five years
Equipment: $800,000 with a salvage value of $100,000 after five years
Expected increase in working capital: $100,000 (recoverable at the end of five years)
Annual cash operating expenses: estimated at $450,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.
Required:
1. Estimate the annual cash flows for the new product. Enter cash outflows as negative amounts and cash inflows as positive amounts.
Year
Cash Flow
0
$
14
$
5
$
2. Using the estimated annual cash flows, calculate the NPV. $
3. What ifrevenues were overestimated by $150,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same. Enter cash outflows as negative amounts and cash inflows as positive amounts.
Year
Cash Flow
Present Value
0
$
$
14
5
Net present value
$
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