70. (Postinvestment audit) Ten years ago, based on a before-tax NPV analysis, Johnson Wholesaling decided to add a new product line. The data used in the analysis were as follows:

Discount rate 12%

Life of product line 10 years Annual sales increase:

Years 1–4 $125,000 Years 5–8 $175,000 Years 9–10 $100,000 Annual fixed cash costs $20,000 Contribution margin ratio 40%

Cost of production equipment $125,000 Investment in working capital $10,000 Salvage value $0 Because the product line was discontinued this year, corporate managers decided to conduct a postinvestment audit to assess the accuracy of their planning process. Accordingly, the actual cash flows generated from the product line were estimated to be as follows:

Actual Investment Production equipment $120,000 Working capital 17,500 Total $137,500 Actual Revenues Years 1–4 $110,000 Years 5–8 $200,000 Years 9–10 $105,000 Actual Fixed Cash Costs Years 1–4 $15,000 Years 5–8 $17,500 Years 9–10 $25,000 Actual contribution margin ratio 35%

Actual salvage value $5,000 Actual cost of capital 12%

a. Determine the projected NPV on the product line investment.

b. Determine the NPV of the project based on the postinvestment audit.

c. Identify the factors that are most responsible for the differences between the projected NPV and the postinvestment audit NPV.