The Frank Stone Company is considering the introduction of a new product.Generally, the company's products have a life of about 5 years, after which they are deleted from the range of products that the company sells.The new product requires the purchase of new equipment costing $4,000,000, including freight and installation charges.The useful life of the equipment is 5 years, with an estimated resale of equipment of $1,575,000 at the end of that period.The equipment will be fully depreciation to zero value using the straight line (prime cost) method.

The new product will be manufactured in a factory already owned by the company.This factory is currently being rented to another company under a lease agreement that has 5 years to run and provides for an annual rental of $150,000.Under the lease agreement, the Frank Stone Company can cancel the lease by immediately (year 0) paying the lessee compensation equal to 1 year's rental payment.

It is expected that the product will involve the company in sales promotion expenditures that will amount to $500,000 during the first year the product is on the market.Additions to current assets (net working capital) will require $225,000 at the commencement of the project and are assumed to be fully recoverable at the end of the fifth year.

The new product is expected to generate sales revenue as follows:

Year 1: $3,000,000

Year 2: $3,500,000

Year 3: $3,250,000

Year 4: $3,000,000

Year 5: $1,500,000

It is assumed that all cash flows are received at the end of each year.The corporate tax rate is 35%.