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    Relevant cash flows

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    Your company currently sells oversized golf clubs. The Board of Directors wants you to look at replacing them with a line of super-sized clubs. Briefly explain whether the following are relevant cash flows to this analysis and if so, how those cash flows can affects any decision.
    a. $300,000 drop in sales from terminating the oversized line of clubs
    b. $750,000 in land you own that may be used for the project
    c. $200,000 spent on Research and Development last year on oversized clubs
    d. $350,000 you will pay to Fred Singles to promote your new clubs
    e. $125,000 you will receive by selling the existing production equipment which must be replaced

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    Solution Preview

    a. $300,000 drop in sales from terminating the oversized line of clubs

    This is called as erosion and is relevant cash flow since the reduction in sales is due to the new project. We need to reduce the cash flows of the new project by the after tax loss of income due to drop in sales by terminating the line. The cash flows will reduce and this will ...

    Solution Summary

    The solution explains which cash flows are relevant to decision.

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