Question: Carsen Sorensen controller of Thayn Company just received the following

Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:
• Expected annual revenues: $750,000
• Projected product life cycle: five years
• Equipment: $800,000 with a salvage value of $100,000 after five years
• Expected increase in working capital: $100,000 (recoverable at the end of five years)
• Annual cash operating expenses: estimated at $450,000
• Required rate of return: 8 percent
1. Estimate the annual cash flows for the new product.
2. Using the estimated annual cash flows, calculate the NPV.
3. What if revenues were overestimated by $150,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same.

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  • CreatedSeptember 01, 2015
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