A company is considering investing in a new product that costs $500,000 upfront to develop. The sales department was asked to forecast the profit (cash flows) each year for the next 5 years. The finance department believes that going beyond 5 years is unreasonable. The finance department also feels that the total present value of the annual profits must exceed the initial investment ($500,000) to make the investment worthwhile. The company has determined that their opportunity cost is 5%. The sales department came back with the following end of year annual forecast of profit (cash flows).

Year	End of year profit/cash flow
1	$60,000
2	$140,000
3	$180,000
4	$120,000
5	$110,000

Assume the terms profit and cash flows mean the same thing.

1. What is the present value of the cash flows, each year and in total?

2. Based on the sales forecast, and the initial investment required, should the company make the investment, why or why not? 3. What concerns do you have about this type of analysis? What are the potential weaknesses? What could go wrong or change? Point out any areas of concern in this case.