Sunk costs and opportunity costsMasters Golf Products, Inc., spent 2 years and $1,150,000 to develop...
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Sunk costs and opportunity costsMasters Golf Products, Inc., spent 2 years and $1,150,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing them, the company will have to invest $1,840,000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $741,000 per year for the next 14 years. The company has determined that the existing line could be sold to a competitor for $250,000.
a. How should the $1,150,000 in development costs be classified?
b. How should the $250,000 sale price for the existing line be classified?
c. What are all the relevant cash flows for years 0 thru 14? (Note: Assume that all of these numbers are net of taxes.)
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