Mountain Recreation, Inc. is considering a new product line. The company currently manufactures
several lines of snow skiing apparel.
The new products, insulated ski bikinis, are expected to
generate sales of $1.2 million per year for the next five years. They expect that during this five-year
period, they will lose about $150,000 each year in sales on their existing lines of longer ski pants.
The new line will require no additional equipment or space in the plant and can be produced in the
same manner as the apparel products. The new project will, however, require that the company
spend an additional $50,000 per year on insurance in case customers sue for frostbite. Also, a new
marketing director would be hired to oversee the line at $75,000 per year in salary and benefits.
Because of the different construction of the bikinis, an increase in inventory of $9,000 would be
required initially. If the marginal tax rate is 35%, compute the incremental after-tax cash flows for
years 1-5.
A) $634,500 per year B) $537,500 per year
C) $625,000 per year D) $601,250 per year
D
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