Use the following information to answer the 8 questions (filling in the blanks) that follow it. When answering the questions, DO NOT use dollar signs, DO NOT use parenthesis to denote negative numbers, USE the negative sign and place it in front of first digit of your answer when your answer is a negative number. Enter answer en millions rounding to 2 decimals. For example,

if your answer is -$1,246,300.40 then enter -1.25;

if your answer is $462,100.20 then enter 0.46;

if your answer is $100,000 then enter 0.10;

RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $6 million a year. Variable costs are 70% of sales. The project is expected to last 10 years. Also, non-variable costs are $1 million per year. The company has spent $2 million in research and a marketing study that determined the company will lose (cannibalization) $0.8 million in sales a year of its existing low-priced stoves. The production variable cost of the existing low-priced stoves is $0.5 million a year.

The plant and equipment required for producing the new line of stoves costs $2 million and will be depreciated using 7-year class MACRS depreciation. It is expected that the plant and equipment can be sold (salvage value) for $0.5 million at the end of 10 years. The new stoves will also require today an increase in net working capital of $0.4 million that will be returned at the end of the project.

The tax rate is 25 percent and the cost of capital is 10%.

*** Enter your answers in millions, rounding off to 2 decimals. For example, if your answer is 3,426,000 then enter 3.43; if your answer is 1,000,000 then enter 1.00

1. What is the initial outlay (IO) for this project?

2. What is the annual incremental net cash flow (operating cash flow: OCF) for this project?

3. What is the remaining book value for the plant at equipment at the end of the project?

4. What is the cash flow due to tax on salvage value for this project?

5. What is the project’s cash flow for year 10 for this project?

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