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2. New product analysis. Perkins Company is considering the introduction of a new product which will be manufactured in an existing plant; however, new equipment
2. New product analysis. Perkins Company is considering the introduction of a new product which will be manufactured in an existing plant; however, new equipment costing $150,000 with a useful life of five years (no salvage value) will be necessary. The space in the existing plant to be used for the new product is currently used for warehousing. When the new product takes over the warehouse space, on which the actual depreciation is $20,000, Perkins Company will rent ware- house space at an annual cost of $25,000. An accounting study produces the following estimates of differential revenue and expense on an average annual bas is $500,000 Sales Cost of merchandise sold (excluding depreciation...385,000 Depreciation of equipment (straight-line Marketing expenses. .30,000 10,000 The company requires an average annual rate of return of 11% (after income tax) on the average investment in proposals. The effective income tax rate is 46%. (Ignore the time value of money.) Required: (1) The average annual differential cost for the first five years (including income tax) which (2) The minimum annual net income needed to meet the company's requirement for this pro- (3) The estimated annual differential income (after allowing for return on investment in new (AICPA adapted) must be considered in evaluating this decision posal equipment) resulting from introduction of the new product. (4) The estimated differential cash flow during the third year
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