Question

 Masters Golf​ Products, Inc., spent 2 years and $ 1040000 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 $ 1820000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $ 740000 per year for the next 14 years. The company has determined that the existing line could be sold to a competitor for $ 249000. a. How should the $ 1040000 in development costs be​ classified? b. How should the $ 249000 sale price for the existing line be​ classified? c. What are all the relevant cash flows for years 0 thru 14​? ​(Note: Assume that all of these numbers are net of​ taxes.)

a. How should the

$ 1 comma 040 comma 000$1,040,000

in development costs be​ classified?  ​(Select the best answer​below.)

A.The

$ 1 comma 040 comma 000$1,040,000

development costs should not be considered part of the decision to go ahead with the new production. This money has already been spent and cannot be retrieved so it is an opportunity cost.

B.The

$ 1 comma 040 comma 000$1,040,000

development costs should be considered part of the decision to go ahead with the new production. This money has already been spent as part of the investment project.

C.The

$ 1 comma 040 comma 000$1,040,000

development costs should be considered part of the decision to go ahead with the new production. This money has already been spent as part of the opportunity cost of the project.

D.The

$ 1 comma 040 comma 000$1,040,000

development costs should not be considered part of the decision to go ahead with the new production. This money has already been spent and cannot be retrieved so it is a sunk cost.

b. How should the

$ 249 comma 000$249,000

sale price for the existing line be​ classified?  ​(Select the best answer​ below.)

A.The

$ 249 comma 000$249,000

sale price of the existing line is a sunk cost. If Masters Golf Products does not proceed with the new line of clubs they will not receive the

$ 249 comma 000$249,000.

B.The

$ 249 comma 000$249,000

sale price of the existing line is an opportunity cost. If Masters Golf Products does not proceed with the new line of clubs it will lose the opportunity to recover the

$ 249 comma 000$249,000

in inventory.

C.The

$ 249 comma 000$249,000

sale price of the existing line is a sunk cost. If Masters Golf Products proceeds with the new line of clubs the existing line worth

$ 249 comma 000$249,000

will be wasted.

D.The

$ 249 comma 000$249,000

sale price of the existing line is an opportunity cost. If Masters Golf Products does not proceed with the new line of clubs they will not receive the

$ 249 comma 000$249,000.

c. The cash flow for year 0 is

​$nothing.

​(Round to the nearest​ dollar.)

The cash flow for years 1 thru

1414

is

​$nothing.

​(Round to the nearest​ dollar.)

Answer 1

a). Development costs are classified as sunk costs and are not factored into capital investment decisions. Option D is correct.

b). The proceeds from the sale of the existing line is an opportunity cost. If the company does not go ahead with the new line of clubs, it will not receive the sale price of the existing line. Option D is correct.

c). Year 0 cash flow = investment in new line outflow + sale of existing line inflow

= -1,820,000 + 249,000 = -1,571,000 outflow

Cash flow from Year 1 to Year 14 is the operating cash flow of $740,000