Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen

Exercise 19

NET PRESENT VALUE
Jan Booth, controller of Golding Company, just received the following data associated with production of a new product:
• Expected annual revenues, $300,000
• A projected product life cycle of five years
• Equipment, $320,000 with a salvage value of $40,000 after five years
• Expected increase in working capital, $40,000 (recoverable at the end of five years)
• Annual cash operating expenses are estimated at $180,000.
• The required rate of return is 8 percent.
Required:
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 $60,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same.