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Chapter 11, Problem 11.4P

Sunk costs and opportunity costs Masters Golf Products Inc. spent 3 years and $1,000,000 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 $1,800,000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $750,000 per year for the next 10 years. The company has determined that the existing line could be sold to a competitor for $250,000.

  1. a. How should the $1,000,000 in development costs be classified?
  2. b. How should the $250,000 sale price for the existing line be classified?
  3. c. Depict all the known incremental cash flows on a timeline.
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Chapter 11 Solutions

Principles of Managerial Finance, Student Value Edition Plus MyLab Finance with Pearson eText - Access Card Package (15th Edition) (Pearson Series in Finance)

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