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Unformatted text preview: club heads to replace a line that is
becoming obsolete. In order 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.
a. How should the $1,000,000 in development costs be classified?
b. How should the $250,000 sale price for the existing line be classified?
c. Depict all of the known relevant cash flows on a time line. LG3 8–6 Sunk costs and opportunity costs Covol Industries is developing the relevant
cash flows associated with the proposed replacement of an existing machine tool
with a new, technologically advanced one. Given the following costs related to
the proposed project, explain whether each would be treated as a sunk cost or
an opportunity cost in developing the relevant cash flows associated with the
proposed replacement decision. CHAPTER 8 Capital...
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- Fall '13