Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new

Question:

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 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
Required:
1. Estimate the annual cash flows for the new product.
2. Using the estimated annual cash flows, calculate the NPV.
3. What if revenues were overestimated by $150,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same.
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...