1. Background of the Case Ben Guslits, vice-president of sales, has recommended adding a new product line. A market Study and cost analyses show that the new line should yield the following annual results: Net Sales 2,800,000 in to Cost of Sales 1,600,000 Operating Expenses 200,000 Total Expenses S 1,800,000 Income before income taxes S 1,000,000 Income taxes (40%) 400,000 Net Income $ 600,000 Depreciation of $150,000 is included in the total expenses. Cost of Sales and operating expenses include only direct cost of the new line. Net Sales $ 12,000,000 Cost of Sales 7,500,000 Operating Expense 1,800,000 Total Expense 9,300,000 Operating Income S 2,700,000 Interest Expense 100,000 Income before income taxes $ 2,600,000 Income taxes (40%) 1,040,000 Net Income $ 1,560,000 Total Assets $ 12,000,000 Current Liabilities 3,000,000 Long term debt 1,000,000 Shareholder's Equity 8,000,000 Total liabilities & Equities $ 12,000,000*Depreciation expense included total $400,000 for the firm The investment in additional equipment for the production and sale of the new product line has been estimated at $3,000,000.00. "The new product line will yield a 20 percent return on assets," Guslits states. Steve Grunewald, the vice president of production, interrupts. "Are you talking about a cash flow return, Ben?" he asks. "No," Guslits answers. "When depreciation is added back, the cash-flow return will be even greater." The vice president of finance, Jude Gallagher, ask, "How do you think we should finance the investment?" "We should be able to issue long-term notes," Guslits responds. "Our debt at the present is modest. And, with debt financing, we gain the advantage of leverage." "In your estimate, Ben, you forgot to include any interest cost. It will cost us $150,000 after income taxes to finance $3,000,000,"Gallagher replies II. Requirements 1. What impacts will the new product line have on profit measures and cash flows