Reference no: EM133019036
Question - Mitcham Ltd is considering a 4-year project to introduce a new clothes dryer, Cooldry. The company tax rate is 32%. The following is the additional information about the project.
(i) The expected annual unit sales of Cooldry is 150,000 units; the price is $1600 per unit. The variable production costs are $1150 per unit. The fixed overhead cost consisting of an apportionment of the salaries of the top executives is $400,000 per year.
(ii) The production of Cooldry will require the purchase of a new production line at a cost of $5,300,000. The production line will be fully depreciated over the project life of 4 years using straight-line depreciation method.
(iii) $45,000 and $22,000, respectively, have been spent on developing the prototype of Cooldry and a market survey to assess the demand for Cooldry.
(iv) The introduction of Cooldry is expected to reduce the sales of Mitcham's existing clothes dryer, Quickdry by 52,000 units per year. Quickdry has a unit price of $1300 per unit, a unit variable cost of $750 and fixed costs of $172,000 per year.
Assess and explain whether or not each of the items (i) to (iv) above should be included in the estimation of the incremental annual cash flow from operations. Calculate the after-tax incremental annual cash flow from operations.
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