K (Identifying incremental revenues from new product innovations) Morten Food Products, Inc. is a regional manufacturer of salty food snacks. The firm competes directly with the national brands including Frito-Lay, but only in the U.S. Southeast. Last year Morten sold $300 million of its various chip products and hopes to increase its sales in the coming year by offering a new line of baked chips. The new product line is expected to generate $37 million in sales next year. However, the firm's analysts estimate that about 60 percent of these revenues will come from existing customers who switch their purchases from one of the firm's existing products to the new healthier baked chips. a. What level of incremental sales should the company analyst attribute to the new line of baked chips? b. Assume that 15 percent of Morten's existing customers are actively looking for a healthier snack alternative and will move to another company's baked chip offering if Morten does not introduce the new product. What level of incremental sales would you attribute to the new line of baked chips in this circumstance? K (Related to Checkpoint 12.1) (Calculating changes in net operating working capital) Tetious Dimensions is introducing a new product and has an expected change in net operating income of $755,000. Tetious Dimensions has a 36 percent marginal tax rate. This project will also produce $210,000 of depreciation per year. In addition, this project will cause the following changes in year 1: Without the Project With the Project Accounts receivable Inventory $59,000 $91,000 103,000 175,000 Accounts payable 65,000 116,000 (Click on the icon in order to copy its contents into a spreadsheet.) What is the project's free cash flow in year 1? (Calculating changes in net operating working capital) Duncan Motors is introducing a new product and has an expected change in net operating income of $320,000. Duncan Motors has a 33 percent marginal tax rate. This project will also produce $47,000 of depreciation per year. In addition, this project will cause the following changes in year 1: Accounts receivable Inventory Accounts payable Without the Project With the Project $34,000 $18,000 31,000 39,000 45,000 88,000 (Click on the icon in order to copy its contents into a spreadsheet.) What is the project's free cash flow in year 1? K (Calculating operating cash flows) The Heritage Farm Implement Company is considering an investment that is expected to generate revenues of $2,900,000 per year. The project will also involve annual cash expenses (including both fixed and variable costs) of $700,000, while increasing depreciation by $440,000 per year. If the firm's tax rate is 29 percent, what is the project's estimated net operating profit after taxes? What is the project's annual operating cash flow? (Related to Checkpoint 12.1) (Calculating project cash flows and NPV) You are considering expanding your product line that currently consists of skateboards to include gas-powered skateboards, and you feel you can sell 12,000 of these per year for 10 years (after which time this project is expected to shut down with solar-powered skateboards taking over). The gas skateboards would sell for $110 each with variable costs of $30 for each one produced, and annual fixed costs associated with production would be $140,000. In addition, there would be a $1,400,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplified straight-line method down to zero over 10 years. The project will also require a one-time initial investment of $60,000 in net working capital associated with inventory, and this working capital investment will be recovered when the project is shut down. Finally, assume that the firm's marginal tax rate is 37 percent. a. What is the initial cash outlay associated with this project? b. What are the annual net cash flows associated with this project for years 1 through 9? c. What is the terminal cash flow in year 10 (that is, what is the free cash flow in year 10 plus any additional cash flows associated with termination of the project)? d. What is the project's NPV given a required rate of return of 9 percent?