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(Consideration of sunk and opportunity costs) Hewlett-Packard has designed a new type of printer that produces professional-quality photos. These new printers took 2 years to develop, with research and development running at $10 million after taxes over that period. Now all that’s left is an investment of $22 million after taxes in new production equipment. It is expected that this new product line will bring in free cash flows of $5 million per year for each of the next 10 years. In addition, if HewlettPackard goes ahead with the new line of printers, the current production facility for the old printers that are to be replaced with this new line could be sold to a competitor, generating $3 million after taxes.

a. How should the $10 million of research and development be treated?

b. How should the $3 million from the sale of the existing production facility for the old printers be treated?

c. Given the information above, what are the cash flows associated with the new printers?


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