Question
Masters Golf Products, Inc., spent 3 years and $1,050,000 to develop its new line of club heads to replace a line that is becoming obsolete.
Masters Golf Products, Inc., spent 3 years and $1,050,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing them, the company will have to invest $1,780,000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $745,000 per year for the next 12 years. The company has determined that the existing line could be sold to a competitor for $252,000.
a. How should the $1,050,000 in development costs be classified?
b. How should the $252,000 sale price for the existing line be classified?
c. What are all the relevant cash flows for years 0 thru 12? (Note: Assume that all of these numbers are net of taxes.)
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