1. (Relevant cash flows) Captins' Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. The new cereal will be similar to the old with the exception that it will contain sugarcoated marshmallows shaped in the form of stars and will be called Crunch Stuff n' Stars. It is estimated that the sales for the new cereal will be $23 million; however, 25 percent of those sales will be former Crunch Stuff customers who have switched to Crunch Stuff n' Stars but who would not have switched if the new product had not been introduced. What is the relevant sales level to consider when deciding whether to introduce Crunch Stuff n' Stars? A. What is the risk-adjusted NPV of project A? (Round to the nearest cent.) b. What is the risk-adjusted NPV of project B? Round to the nearest cent.)

2. (Calculating operating cash flows) Assume that a new project will annually generate revenues of $2,400,000 for the next 3 years. Cash expenses including both fixed and variable costs will be $600,000 per year, bonus depreciation will be $1,200,000 in year 1, and the firm has enough income in other areas to offset any tax losses that might occur in year 1. In addition, let's assume that the firm's marginal tax rate is 25 percent. Calculate the operating cash flows in years 1 through 3. Question content area bottom a. What are the firm's operating cash flows in year 1? ( Round to the nearest dollar.) b. What are the firm's operating cash flows in years 2 and 3? (Round to the nearest dollar.)

3. (Calculating free cash flows) You are considering new elliptical trainers and you feel you can sell 5,000 of these per year for 5 years (after which time this project is expected to shut down when it is learned that being fit is unhealthy). The elliptical trainers would sell for $1,200 each and have a variable cost of $600 each. The annual fixed costs associated with production would be $1,300,000. In addition, there would be a $7,000,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the bonus depreciation method in year 1. This project will also require a one-time initial investment of $1,500,000 in net working capital associated with inventory, and working-capital investment will be recovered when the project is shut down. Finally, assume that the firm's marginal tax rate is 24 percent. a. What is the initial outlay associated with this project? Round to the nearest dollar.) b. What is the free cash flows associated with this project for year 1?(Round to the nearest dollar.) What are the free cash flows associated with this project for years 2 through 4 (note that the cash flows for years 2 through 4 are equal)? (Round to the nearest dollar.) c. What is the terminal cash flow in year 5 (that is, what is the free cash flow in year 5 plus any additional cash flows associated with the termination of the project)? Round to the nearest dollar.) d. What is the project's NPV given a required rate of return of 9 percent? Round to the nearest dollar.)