Absolutely, this **should be considered** in your sensitivity analysis and in your primary evaluation of the new product line. ### Why Should It Be Considered? This $50,000 annual decrease in sales of the firm’s other lines due to the new product is an example of **cannibalization**—where the introduction of a new product reduces the sales of existing products. This is a **real economic cost** to the firm and should be included in any financial analysis of the new product line. Ignoring this effect would **overstate the net benefit** of the new product, leading to potentially poor decision-making. --- ### How Should It Be Considered? The $50,000 decrease in other product lines’ sales should be included as a **reduction in net cash flows** attributable to the new product line. Here’s how you can incorporate it: 1. **Project Cash Flows:** Start with the new product line’s expected annual cash inflows. 2. **Subtract Cannibalized Sales:** Subtract the $50,000 per year that is lost from existing lines, as this is an **opportunity cost** of introducing the new product. 3. **Adjust for Profit Margin:** If the $50,000 is lost revenue, and you know the profit margin on those sales, you may subtract only the lost **gross profit** (not the full sales amount), because you avoid the costs of producing those lost sales. - **If the $50,000 is lost profit**, subtract the full amount. - **If the $50,000 is lost sales revenue**, multiply by the profit margin to find the lost profit to subtract. 4. **Sensitivity Analysis:** Vary this cannibalization effect in your sensitivity analysis. For example, consider what happens if the decrease is $0, $25,000, $50,000, or $100,000 annually, and see how this affects the net present value (NPV) or internal rate of return (IRR) of the new line. --- ### Example (basic): Suppose: - New product line expected annual net cash inflow (before cannibalization): $200,000 - Annual lost profit from other lines: $50,000 **Net annual benefit = $200,000 - $50,000 = $150,000** Use this $150,000 in your discounted cash flow or NPV analysis. --- ### Summary Table | Year | New Product Cash Flow | Lost Profit from Other Lines | Net Cash Flow | |------|----------------------|-----------------------------|---------------| | 1 | $200,000 | -$50,000 | $150,000 | | 2 | $200,000 | -$50,000 | $150,000 | | ... | ... | ... | ... | --- ### **Summary Statement** **Yes, the expected $50,000 annual decrease in other product lines' sales should be included in your analysis, as it represents an opportunity cost (cannibalization) caused by the new product. Subtract this amount from the new product line’s cash flows when evaluating profitability, and vary it as a parameter in your sensitivity analysis to assess the robustness of your decision.**