New Product Analysis. Amex Company is considering the introduction of a new product which will be manufactured in an existing plant; however, new equipment costing $150,000 with a useful life of five years (no salvage value) will be necessary. The space in the existing plant to be used for the new product

is currently used for warehousing. When the new product takes over the ware- house space, on which the actual depreciation is $20,000, Amex Company will

rent warehouse space at an annual cost of $25,000. An accounting study pro- duces the following estimates of differential revenue and expense on an average

annual basis:

Sales	.	$500,000
Cost of merchandise sold (excluding depreciation)	.	385,000
Depreciation of equipment (straight-line)	.	30,000
Marketing expense	.	10,000

The company requires an average annual rate of return of 11% (after in- come taxes) on the average investment in proposals. The effective income tax rate is 46%. (Ignore the time value of money.)

Required: (1) The average annual differential costs for the first five years (including income taxes) which must be considered in evaluating this decision. (2) The minimum annual net income needed to meet the company's re-

quirement for this proposal.

(3) The estimated annual residual income (after allowing for return on in- vestment in new equipment) resulting from introduction of the new product.

(4) The estimated differential cash flow during the third year.