Question

Masters Golf​ Products, Inc., spent 4 years and $ 1 comma 200 comma 000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing​ them, the company will have to invest $ 1 comma 790 comma 000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $ 746 comma 000 per year for the next 13 years. The company has determined that the existing line could be sold to a competitor for $ 254 comma 000. a. How should the $ 1 comma 200 comma 000 in development costs be​ classified? b. How should the $ 254 comma 000 sale price for the existing line be​ classified? c. What are all the relevant cash flows for years 0 thru 13​? ​(Note: Assume that all of these numbers are net of​ taxes.)

Answer 1

Answer:

The development should be not be considered as it not a relevant cash outflow

The $254,000 sale price for existing line is a relevant cash inflow

Cash flows:

Year    0      -$$1,536,000

Years 1-13     $746,000

Explanation:

The development cost has already been incurred,it is not a relevant cash outflow since the cash flows to be considered are those would be incurred in the future in respect of the new line of club heads.

The sale price  of the existing line is a relevant inflow as it would only be received as a result of switching to the new line of club heads.

The relevant  cash  flow from year 1 to 13 is computed thus:

year 0 cash outflow would be the cost of new equipment less the sale price of existing line i.e -$1,790,000+$254,000=-$1,536,000

In years 1 to 13 ,there would cash inflow of $746,000 in each year