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Hewlett- Packard has designed a new type of printer that produces professional- quality photos. These new printers took 2 years

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Hewlett- Packard has designed a new type of printer that produces professional- quality photos. These new printers took 2 years to develop, with research and development running at $ 10 million after taxes over that period. Now all that’s left is an investment of $ 22 million after taxes in new production equipment. It is expected that this new product line will bring in free cash flows of $ 5 million per year for each of the next 10 years. In addition, if Hewlett- Packard goes ahead with the new line of printers, the current production facility for the old printers that are to be replaced with this new line could be sold to a competitor, generating $ 3 million after taxes.
a. How should the $ 10 million of research and development be treated?
b. How should the $ 3 million from the sale of the existing production facility for the old printers be treated?
c. Given the information above, what are the cash flows associated with the new printers?

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a The 10 million spend on research and development should be considered a sunk cost and not …View the full answer


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Foundations of Finance The Logic and Practice of Financial Management

Foundations of Finance The Logic and Practice of Financial Management

ISBN: 978-0132994873

8th edition

Authors: Arthur J. Keown, John D. Martin, J. William Petty

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Question Posted: September 11, 2015 07:29:34
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