Question: Although he was initially satisfied by the apparent profitability of
Although he was initially satisfied by the apparent profitability of the new project, the Avon company's chief executive officer (CEO) was troubled by some other aspects of the project that he thought the finance manager had left out of the analysis. First, he was concerned about whether the new project could possibly cannibalize sales of the firm's existing products. In a worst-case scenario, he believed that a negative effect on after-tax cash flows by as much as $650,000 per year was possible. Second, a building owned by the company, but unoccupied, would be used to produce the new product. They had recently received an offer from an adjacent business to rent this property for $100,000 per year. Finally, the firm had commissioned and already paid to a consultant $500,000 for a market study of the new product. How would the project's profitability be affected by including these items in the cash-flow estimates that are shown on the table in Review Problem 6?
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