RET Inc. currently has one product, low-priced stoves. RET Inc.has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $6 million a year. Variable costs are 70% of sales.The project is expected to last 10 years. Also,non-variable costs are $1 million per year. The company has spent $2 million in research and a marketing study that determined the company will lose (cannibalization) $0.8 million in sales a year of its existing low-priced stoves. The production variable cost of the existing low-priced stoves is $0.5 million a year.

The plant and equipment required for producing the new line of stoves costs $2 million and will be depreciated using 7-year class MACRS depreciation. It is expected that the plant and equipment can be sold (salvage value) for $0.5 million at the end of 10 years. The new stoves will also require today an increase in net working capital of $0.4 million that will be returned at the end of the project.

The tax rate is 25 percent and the cost of capital is 10%.

MACRS Fixed Annual Expense Percentages by Recovery Class 10- 15- Year 3-Year 5-Year 7-Year Year Year 33.33%20.00%14.29%10.00%5.00% 44.45%32.00%24.49%18.00%9.50% 14.81%19.20%17.49%14.40%8.55% 7.41% 11.52%12.49%11.52%7.70% 11.52%8.93% 9.22% 6.93% 5.76% 8.93% 7.37% 6.23% 8.93% 6.55% 5.90% 4.45% 6.55% 5.90% 6.56% 5.91% 6.55% 5.90% 11 3.28% 5.91% 12 5.90% 13 5.91% 14 5.90% 15 5.91% 16 2.95%