9.5 Incremental Cash Flow. Which of the following cash flows should be treated as incremental cash flows when computing the net present value of an investment?

Year Sales Growth 2 40%

3 25%

4 20%

5 10%

First Year Sales: 20,000 units Unit Price: $50 years 1–2

$60 years 3–5 Working Capital: $63,000 initially (year 0 with recovery)

Variable Cost: $45 per unit Fixed Cost (exc. depr.): $60,000 Initial Investment: $750,000 (depreciate to $0)

Salvage Value: $50,000 at the end of year 5 Tax Rate: 35%

Cost of Capital: 12%

Incremental (Inc)

Nonincremental (NI)

A. Expenditure on plant and equipment.

B. Cost of R&D undertaken in connection with a new product during the last 3 years.

C. Dividend payments.

D. Reduction in the sales of the company’s other products.