Stanton Inc. is considering adding a new product line (the product code is XYZ). The company has spent total of $150,000 so far for research and development for this product, and just paid another $50,000 to a consulting firm to do the marketing research. The consulting firm has estimated that the product will have a very short life of only 3 years. It has also estimated that the annual sales volume will be 50,000 units and the selling price is $50 per unit. Further it has predicted that the sales volume of a current product will drop by 10,000 units because XYZ can substitute the current product. The selling price for the current product is $35 per unit.

The Production Department of Stanton has calculated that it needs a new machine for XYZ production. The total costs, including installation and shipping, for the machine are $1,000,000. Stanton uses the MACRS method to depreciate all of its assets (see depreciation rates in the table below), and it expects that the machine will last 5 years. The machine can be sold for book value when Stanton stops using the machine.

The variable costs for the current product and XYZ are $15 and $30 per unit, respectively. The annual fixed operating costs and advertising expenses will increase (from the current level) by $100,000. The working capital will increase by $50,000 at the beginning of the project due to an increase in inventory, and it will be recovered at the end of the project. The companys marginal tax rate is 40%.

Year	1	2	3	4	5
Depreciate rate	25%	30%	20%	15%	10%

a. How many years of cash flow need to be estimated?

b. Identify sunk costs. How much is the total amount of sunk costs?

c. What is the initial investment? Do not include change in net working capital here.

d. What is cash flow as a result of change in net working capital at year 0?

e. What is operating cash flow at year 1?

f. What is the terminal cash flow? Do not include change in net working capital here.

g. What is "total" cash flow at the end of the project?