Cally spent $265,000 over the past few months developing and test marketing the range. At the same time it also spent $522,000 on new production equipment for this product. The equipment and the product both have an estimated life of five years, and the residual value on the equipment is $12,000. Cally uses straight line depreciation for all equipment.

Projected annual cash flows from sales are $470,000 per annum (these include sales diverted from existing product lines which are estimated to be $95,000 per annum).

Direct costs of production are estimated to be 44% of sales. The production would be housed in currently spare factory and warehouse space. This is 'rented' to projects and for this initiative the charge would be $36,500 per annum. The project will also be allocated a share of the company's overheads, which in this case will be $24,500. It would be necessary to hold working capital of approximately $80,000 to service the project.

Cally's required rate of return on its investments is 12%.Ignore Taxation.

(i) Prepare a statement of relevant cash flows for this project, explaining clearly the reasoning behind your decisions to exclude any of the above expenditures.

(ii) Calculate the net present value.