Use the following information for the next three questions. You are an analyst in the corporate finance department of Pet Products, Inc. You have been asked to analyze a potential new product to be introduced. The beef- flavored water will be called Meaty Drink. The beef flavoring will be artificial so as to not close the market to vegetarian pets. To date, $125,000 has been spent on product testing in small focus groups. Estimates suggest that sales of $250,000 each year for the next six years are likely (after which time the project will be terminated). Variable costs will be a constant 23% of sales. In terms of its physical pawprint footprint, the entire project can be squeezed into a small portion of a warehouse already in use without detrimentally affecting other projects. The parent company is about half-way through a 99 year lease on the land and warehouse building. With the addition of the new project to the warehouse, some on-going rent costs (which are already being incurred due to existing projects) will be allocated pro rata to the Meaty Drink" project. Because the total annual rent costs are currently $100,000 and the new project represents 20% of the firm, $20,000 of the total rent will be charged against the new project, starting at the end of the first full year (i.e., at time t=1). Other than the rent, there are no other fixed operating costs. New equipment required at the outset will cost $100,000, to be depreciated straight-line to zero over its ten year accounting (and tax) life. You estimate that the equipment can be resold in six years for $60,000. To maintain proper inventory, there will be net working capital requirements of $99,000 (incurred at beginning of the project), all of which will be recaptured at termination. Assume the firm has a tax rate of 40%. What is the annual operating cash flow at time t=2? O A. Less than zero O B. 97,500 C. 109,500 O D. 117,500 O E. 119,500 O F. 127,500 O G. None of these Use the following information for the next three questions. You are an analyst in the corporate finance department of Pet Products, Inc. You have been asked to analyze a potential new product to be introduced. The beef- flavored water will be called Meaty Drink. The beef flavoring will be artificial so as to not close the market to vegetarian pets. To date, $125,000 has been spent on product testing in small focus groups. Estimates suggest that sales of $250,000 each year for the next six years are likely (after which time the project will be terminated). Variable costs will be a constant 23% of sales. In terms of its physical pawprint footprint, the entire project can be squeezed into a small portion of a warehouse already in use without detrimentally affecting other projects. The parent company is about half-way through a 99 year lease on the land and warehouse building. With the addition of the new project to the warehouse, some on-going rent costs (which are already being incurred due to existing projects) will be allocated pro rata to the Meaty Drink" project. Because the total annual rent costs are currently $100,000 and the new project represents 20% of the firm, $20,000 of the total rent will be charged against the new project, starting at the end of the first full year (i.e., at time t=1). Other than the rent, there are no other fixed operating costs. New equipment required at the outset will cost $100,000, to be depreciated straight-line to zero over its ten year accounting (and tax) life. You estimate that the equipment can be resold in six years for $60,000. To maintain proper inventory, there will be net working capital requirements of $99,000 (incurred at beginning of the project), all of which will be recaptured at termination. Assume the firm has a tax rate of 40%. What is the annual operating cash flow at time t=2? O A. Less than zero O B. 97,500 C. 109,500 O D. 117,500 O E. 119,500 O F. 127,500 O G. None of these