a) Consider the fixed asset cost of the Limited Production and Full Production scenarios. Some managers believe that these costs are S890, 000 and $480,000, respectively, which are the amounts that would have to be spent if all the necessary assets are purchased. Others argue that these costs should be reduced by $90,000, which is the amount of space and equipment that would be saved if production of the existing cleat is discontinued. Based on information in the case, which set of estimates is most appropriate? Explain.

(b) Estimate the cash flows in years 1998 (t+2) through 2003 (t+7) for the Full Production Scenario. Keep in mind that only the change in net working capital is relevant when calculating these cash flows, and the relevant tax rate is 40 percent. NOTE: The table below shows the annual cash flows (in $000s) of the Limited Production Scenario from 1998-2003. The amounts are based on information in the case and Exhibits 2 and 3. The year-7 amount includes the recapture of working capital plus the after-tax market value of the fixed assets. $+1 1998 28.6 +2 1999 17.8 +3 2000 82.6 +4 2001 108.2 +5 2002 108. 2 t+6 2003 330.0|| Cash Flow EXHIBIT 2 Annual Unit Sales Estimates for Each Scenario* Scenario Year Limited Production Full Production 1998 (t + 2) 1999 2

$+1 1998 28.6 +2 1999 17.8 +3 2000 82.6 +4 2001 108.2 +5 2002 108. 2 t+6 2003 330.0|| Cash Flow EXHIBIT 2 Annual Unit Sales Estimates for Each Scenario* Scenario Year Limited Production Full Production 1998 (t + 2) 1999 2000-2003 20,000 25,000 30,000 70,000 80,000 110,000 EXHIBIT 3 Selected Cost Estimates for Each Scenario Full Production t+2 1998 t+3 1999 t+4 to t+7 2000-2003 Administrative Marketing Miscellaneous fixed (cash) $156,800 $137,200 $ 70,600 $179,200 $112,000 $ 78,400 $246,400 $ 77,000 $ 80,100 Limited Production t+2 t+4 to t+7 Administrative Marketing Miscellaneous fixed (cash) $ 84,000 $ 30,000 $ 39,200 6+3 $105,000 $ 30,000 $ 49,000 $100,800 $ 25,000 $ 50,400 $+1 1998 28.6 +2 1999 17.8 +3 2000 82.6 +4 2001 108.2 +5 2002 108. 2 t+6 2003 330.0|| Cash Flow EXHIBIT 2 Annual Unit Sales Estimates for Each Scenario* Scenario Year Limited Production Full Production 1998 (t + 2) 1999 2000-2003 20,000 25,000 30,000 70,000 80,000 110,000 EXHIBIT 3 Selected Cost Estimates for Each Scenario Full Production t+2 1998 t+3 1999 t+4 to t+7 2000-2003 Administrative Marketing Miscellaneous fixed (cash) $156,800 $137,200 $ 70,600 $179,200 $112,000 $ 78,400 $246,400 $ 77,000 $ 80,100 Limited Production t+2 t+4 to t+7 Administrative Marketing Miscellaneous fixed (cash) $ 84,000 $ 30,000 $ 39,200 6+3 $105,000 $ 30,000 $ 49,000 $100,800 $ 25,000 $ 50,400