A company is considering launching a new product line featuring high quality kitchen knives. The company has spent $$120,000$ developing a new knife line; it also spent another $$12,000$ for market research to determine customer interest. Based on market research, the company expects in the first year to sell $$1,900,000$ of the knives, with an expected annual growth of $6\%$ in sales for years two through five.

The operating expenses are estimated to be $62\%$ of revenue. The company estimates that the initial net working capital investment will be $$50,000,$ while years one through four will be $6\%$ of that year$$s sales. Assume all net working capital will be recovered at the end of the project.

The launch of this new product line is expected to cannibalize the sales of an existing knife, Chop$-$o$-$Matic! by $5,000$ units in the first year, with annual unit growth projected at $5\%$ thereafter. Chop$-$o$-$Matic! is sold at a price of $$20$ per unit $($after tax$)$ and has variable costs of $$12\mathrm{.}50$ per unit $($after tax$).$

To expand production capacity for this new product line, the company is required to have an initial investment of $$900,000$ in factory equipment. The equipment will be depreciated straight$-$line for five years and is expected to have a $$65,000$ salvage value. Based on the operations department$$s best estimate, the company can sell the factory equipment for $$75,000$ at the end of year five.

The company$$s Tax Rate is $20\%.$ The riskiness of this new knife project is estimated to be $95\%$ as risky as the average equity investment. The Market Risk Premium is $7\%,$ and the risk$-$free rate is $4\%.$ Rounded to the nearest dollar, what will be the expected cash flows from erosion costs in year $4?$

Multiple Choice

$-$$$39,375$

None of the choices are correct.

$-$$$24,245$

$-$$$37,500$

$-$$$43,411$