Now assume that sales price will increase by the 4 percent inflation rate beginning after Year 0 (i.e. sales price is $2.00 per unit at Year 0 and $2.08 at Year 1 the end of first year). However, cash operating costs will increase by only 2 percent annually from Year 0, because over half of the costs are fixed by long-term contracts. For simplicity, assume that no other cash flows are affect by inflation. Estimate the projects operating cash flows each year during the next four years by including cannibalization effect but excluding consideration of the cash flows associated with use of the building.

Marketing Cost $265,500 Used Equipment Price $700,000 Expected life 4 years Depreciation | MARCS (.33,.45,.15, and .07) (Yrs 1 to 4)| Shipping $35,000 Installation $70,000 Inventories (increase) $30,000 (at initial investment) Salvage Value (equipment)| $87,500 (after 4 yrs use) | Price $2.00 per carton Fixed Cost | $190,000 Variable Cash Operating cost $1.25 per unit Sales estimated fall due to Cannibalization on High Energy Original if High Energy Lite introduced 30% Lower Sales $80,000 (per year) Reduce production cost $35,000 (per year pre-tax) Net Pre-tax Cannibalization effect |-$80,000 + $35,000 = -$45,000 Tax Rate | 40% WACC | 12% Possible Lease of space | $43,750 for 20 yrs Possible Rent of Coca Cola Space for the Lite Product (almost no capital would have to be invested in the project if rented)|| VP Production concern: Space will be needed in 2 to 3 yrs assuming normal growth in sales of products Marketing Cost $265,500 Used Equipment Price $700,000 Expected life 4 years Depreciation | MARCS (.33,.45,.15, and .07) (Yrs 1 to 4)| Shipping $35,000 Installation $70,000 Inventories (increase) $30,000 (at initial investment) Salvage Value (equipment)| $87,500 (after 4 yrs use) | Price $2.00 per carton Fixed Cost | $190,000 Variable Cash Operating cost $1.25 per unit Sales estimated fall due to Cannibalization on High Energy Original if High Energy Lite introduced 30% Lower Sales $80,000 (per year) Reduce production cost $35,000 (per year pre-tax) Net Pre-tax Cannibalization effect |-$80,000 + $35,000 = -$45,000 Tax Rate | 40% WACC | 12% Possible Lease of space | $43,750 for 20 yrs Possible Rent of Coca Cola Space for the Lite Product (almost no capital would have to be invested in the project if rented)|| VP Production concern: Space will be needed in 2 to 3 yrs assuming normal growth in sales of products