The Smith Company is a beauty products company that is considering a new hair growth product. This new product would encourage hair growth for persons with thinning hair. The new product is expected to generate sales of $500,000 per year and would cost $300,000 to produce each year. It is expected that the patent on the new product would prevent competition from entering the market for at least seven years.

•Smith Company spent $1,000,000 developing the new product over the past four years. The equipment to produce the new product would cost $1,500,000 and would be depreciated for tax purposes 5-year useful life-accelerated depreciation . Smith’s management estimates that the equipment could be sold after 5 years for $400,000. The marginal tax rate for Smith Company is 40%.

•(a) What are the initial cash flows related to the new product?

•(b) What are the cash flows related to the disposition of the equipment after 5 years?

•(c) What are the operating cash flows for each year?

•(d) What are the net cash flows for each year?