xpected annual revenues: $770,000 Projected product life cycle: five years Equipment: $720,000 with a salvage value of $100,000 after five years Expected increase in working capital: $120,000 (recoverable at the end of five years) Annual cash operating expenses: estimated at $462,000 Required rate
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:
- Expected annual revenues: $770,000
- Projected product life cycle: five years
- Equipment: $720,000 with a salvage value of $100,000 after five years
- Expected increase in
working capital : $120,000 (recoverable at the end of five years) - Annual cash operating expenses: estimated at $462,000
- 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
| Year | Cash Flow |
| 0 | $fill in the blank |
| 1–4 | $fill in the blank |
| 5 | $fill in the blank |
2. Using the estimated annual cash flows, calculate the NPV.
$fill in the blank 4
3. What if revenues were overestimated by $154,000? 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 | $fill in the blank | $fill in the blank |
| 1–4 | fill in the blank | fill in the blank |
| 5 | fill in the blank | fill in the blank |
| Net present value | $fill in the blank |
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