We are considering the introduction of a new product. Currently we are in the 34

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We are considering the introduction of a new product. Currently we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital The project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. The following information describes the new projects: Cost of new plant and equipment $ 7,9000,000 Shipping and installation costs $ 1,00,000 Unit sales Year units sold 1 70,000 2 120,000 3 140,000 4 80,000 5 60,000 $300/unit in years 1 through 4, $260/unit in year 5 $180/unit $200,000 per year in years 1-5 There will be an initial working capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Use the simplified straight line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years. a. Should Caledonia focus on cash flows or accounting profits in making its capital- budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits? b. How does depreciation affect free cash flows? c. How does sunk costs affect the determination of cash flows? d. What is the project

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