(Identifying incremental costs for products involving pilot studies) Aero Manufacturing Company is working on a new version of its tried-and-true wind-powered water pump. For 15 years, the firm had manufactured replacement parts for older-style windmills used on farms and ranches throughout the U.S. Southwest. However, the old-style pumps required the use of rods and leather seals that would wear out over time and require servicing. When Aerro's owners initiated the design of a new pumping process, they explored a number of possible designs and spent over $350,000 to fabricate and test the new design before perfecting the system that they are now ready to place into production and begin marketing. To manufacture the new pumps, Aero will have to spend $650,000 on new equipment plus $200,000 on advertising and promotion for the launch of the new product. These expenditures will take place at year-end 2016. a. What is the relevant initial cost of the new pump product? b. Aero's management expects to sell 2,000 of the new units per year for the next 15 years and these units will produce free cash flow for Aero of $190,000 per year. Furthermore, the firm's management estimates that the equipment purchased initially will last for the full 15 years, at which time it will have no salvage value. If Aero uses a rate of return of 9 percent to evaluate its investments, what is the NPV of the new pump investment? a. The relevant initial cost of the new pump product is $ 850,000. (Round to the nearest dollar.) b. The NPV of the new pump investment is $ (Round to the nearest dollar.) Enter your answer in the answer box and then click Check Answer. part remaining Clear All Check