The Smith Company is a beauty products company that is considering a new hair growth product. This
Question:
The Smith Company is a beauty products company that is considering a new hair growth product. This new product would encourage hair growth for persons with thinning hair. The new product is expected to generate sales of $500,000 per year and would cost $300,000 to produce each year. It is expected that the patent on the new product would prevent competition from entering the market for at least seven years.
•Smith Company spent $1,000,000 developing the new product over the past four years. The equipment to produce the new product would cost $1,500,000 and would be depreciated for tax purposes 5-year useful life-accelerated depreciation . Smith’s management estimates that the equipment could be sold after 5 years for $400,000. The marginal tax rate for Smith Company is 40%.
•(a) What are the initial cash flows related to the new product?
•(b) What are the cash flows related to the disposition of the equipment after 5 years?
•(c) What are the operating cash flows for each year?
•(d) What are the net cash flows for each year?
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta