Jan Booth, controller of Golding Company, just received the following data associated with production of a new product:

* Expected annual revenues, $300,000

* A projected product life cycle of five years

* Equipment, $320,000 with a salvage value of $40,000 after five years

* Expected increase in working capital, $40,000 (recoverable at the end of five years)

* Annual cash operating expenses are estimated at $180,000.

¢ The required rate of return is 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 $60,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same.

LO1