Pathways Appliance Company is planning to introduce a built-in blender to its line of small home appliances. Annual sales of the blender are estimated at 12,000 units at a price of $35 per unit. Variable manufacturing costs are estimated at $15 per unit, incremental fixed manufacturing costs (other than depreciation) at $60,000 annually, and incremental selling and general expenses relating to the blenders at $50,000 annually.
To build the blenders, the company must invest $240,000 in molds, patterns, and special equipment. Since the company expects to change the design of the blender every four years, this equipment will have a four-year service life with no salvage value. Depreciation will be computed on a straight-line basis. All revenue and expenses other than depreciation will be received or paid in cash. The company’s combined state and federal tax rate is 40 percent.
b. Compute the annual net cash flows expected from the proposal.