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Hewlett-Packard has designed a new type of printer that produces professional quality photos. These new printers took 2 years to? develop, with research and development running at? $10 million after taxes over that period. Now all? that’s left is an investment of? $22 million after taxes in new production equipment. It is expected that this new product line will bring in free cash flows of? $5 million per year for each of the next 10 years. In? addition, if? Hewlett-Packard goes ahead with the new line of? printers, the current production facility for the old printers that are to be replaced with this new line could be sold to a? competitor, generating? $3 million after taxes.

1. How should the? $10 million of research and development be? treated? ?(Select the best choice? below.)

A.

It should be excluded from the? project’s net cash flows as sunk costs.

B.

It should be included in the? project’s net cash flows as sales revenues.

C.

It should be excluded from the? project’s net cash flows as operating expenses.

D.

It should be included in the? project’s net cash flows as? opportunity-cost cash flows.

2.

How should the? $3 million from the sale of the existing production facility for the old printers be? treated? ?(Select the best choice? below.)

A.

They should be excluded from the? project’s net cash flows as sunk costs.

B.

They should be included in the? project’s net cash flows as sales revenues.

C.

They should be excluded from the? project’s net cash flows as operating expenses.

D.

They should be included in the? project’s net cash flows as? opportunity-cost cash flows.

3.

Given the information? above, what are the cash flows associated with the new? printers? ?(Select the best choice? below.)

A.There are initial cash outlays of? $22

million-?$3

million=?$19

million and cash inflows of? $5 million per year for 10 years.

B.There are initial cash outlays of? $22

million-?$10

million-?$3

million=?$9

million and cash inflows of? $5 million per year for 10 years.

C.There are initial cash outlays of? $22

million-?$10

million=?$12

million and cash inflows of? $5 million per year for 10 years.

D.

There are initial cash outlays of? $22 million and cash inflows of? $5 million per year for 10 years

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