Whats Wrong with this Picture? In the following discussion, see how many errors you can spot and explain briefly why each is an error. You do not need to correct the error. Loretta, I think weve got a winner here. Take a look at these numbers!

Year	0	1	2	3		10
Initial cost	-1000 USD
Units sold		100	100	100		100
Price / unit		15	15	15		15
Total revenue		1500	1500	1500		1500
Cost of good sold		800	800	800		800
Gross profit		700	700	700		700
Operating exepnses
depreciation		100	100	100		100
Interesty expesnes		100	100	100		100
Income before tax		500	500	500		500
Tax 40%		200	200	200		200
Income after tax		300	300	300		300

Now, Loretta, heres how I figure it: The boss says our corporate goal should be to increase earnings by at least 15 percent every year, and this project certainly increases earnings. It adds $300,000 to income after tax every year. My trusty calculator tells me that the rate of return on this project is 30 percent ($300/$1,000), well above our minimum target return of 10 percent. And if you want to use net present value, its NPV dis- counted at 10 percent is $843.50. So, what do you think, Loretta? Well, Denny, it looks pretty good, but I do have a few questions. Shoot, Loretta OK. What about increases in accounts receivable and stuff like that? Not relevant! Well get that money back when the project terminates, so its equivalent to an interest-free loan, which is more of a benefit than a cost. But, Denny, what about extra selling and administrative costs? Havent you left those out? Thats the beauty of this, Loretta. Given the recent recession, I figure we can handle the added business with existing personnel. In fact, one of the virtues of the proposal is that we should be able to retain some people we would otherwise have to terminate. Well, youve convinced me, Denny. Now, I think it will be only fair if the boss puts you in charge of this exciting new project.