To capitalize on consumers' concerns about healthful food, Specific Foods, Inc., is considering a new cereal, Veggie Crisp, which contains small bits of cooked vegetables with bran flakes. As part of its cash flow analysis, the finance department has made the following forecasts of demand and cost:
a. Sales revenue for the first year will be $200,000 and increase to $1,000,000 the next year. Revenue will then grow by 15 percent a year for the next four years, remain the same in the seventh year, and then decline by 15 percent a year for the next three years, when the product will be terminated.
b. Cost of goods sold will be 60 percent of sales.
c. Advertising and general expenses will be $10,000 a year.
d. Equipment will be purchased today for $1,250,000 and will be depreciated over the ten-year project using the straight-line method. Installation cost today is $25,000, and this is depreciated over five years, also on a straight-line basis. The equipment has no salvage value. Other initial costs (which are expensed, not depreciated) total $875,000. There is no investment tax credit.
Calculate net income and operating cash flow using a 35 percent tax rate.