Question

Woodbridge Manufacturing is also considering developing a new assembly line on which to build another new product (not covered in the text). In what category should the costs listed below be placed:

Initial investment outlay (time0)
Supplemental annual cash flows (time1 through timeN)
Terminal value (timeN), or Disregarded?

Also state your reasoning for choosing that classification. Consider each element individually.
This product has been developed over the past three years, at a total cost of $125,000.
The building that Woodbridge is planning to be used is currently rented out to another company for $10,000 per month, and they are on a month-to-month lease so the lease can be terminated with 90 days' notice.
The new product will replace a current product, which is currently generating $12,000 per month in free cash flow (cash earnings less applicable costs).
The machines will cost $750,000.
Travel to see similar machines in operation at another company's factory costed $3,500.
Freight and installation for the machines will cost $75,000.
It is projected that the additional inventories valued at $80,000 will be required to support sales of the product.
Woodbridge will offer 90 day credit terms to purchasers of the new product which are expected to expand accounts receivable by an average of $145,000.
The gross profit (or gross margin) on the sales of the product is expected to be $360,000 per year for the five years of the project.
Purchases of material for the project is expected to increase the balance of the accounts payable by $32,000 during the project life.
Interest on a loan taken out around the time of starting the project will be $12,000 per year.
The salvage value of the machines is expected to be $236,000 at the end of the project.

Answer 1

1	Product Development Cost = 125000 $		This Cost is Initial Investment Outlay as the investment was done to develop the product
2	Rental Income from the building		This is a supplemental annual Cash Flow, however negative as this is the income that firm has to sacifice in order to start the new product
3	Replacing a current product		This 12000 $ per month is supplemental negative Cash flow, as the new product is cannibalising an existing one and its margins
4	Machine Cost		Capex Initial investment as the machines are required to start the product
5	Travel to see similar machines in operation		This is a supplemental annual Cash Flow, however negative as this is the income that firm has to sacifice in order to start the new product
6	Freight and installation for the machines will cost $75,000.		Capex Initial investment as the machines are required to start the product
7	It is projected that the additional inventories valued at $80,000 will be required to support sales of the product.		This is a supplemental annual Cash Flow, however negative as this is the income that firm has to sacifice in order to start the new product
8	Woodbridge will offer 90 day credit terms to purchasers of the new product which are expected to expand accounts receivable by an average of $145,000.		Disregarded
9	The gross profit (or gross margin) on the sales of the product is expected to be $360,000 per year for the five years of the project.		Supplemental Annual Cash Flow
10	Purchases of material for the project is expected to increase the balance of the accounts payable by $32,000 during the project life.		Disregarded
11	Interest on a loan taken out around the time of starting the project will be $12,000 per year.		Disregarded
12	The salvage value of the machines is expected to be $236,000 at the end of the project.		Salvage (Terminal Value)