The Bergen Candy Company has been studying an investment project calling for the manufacture and introduction of a new candy bar to be called Yuppie Nougat. The candy bar is designed to appeal to the yuppie market, so the firm expects to use the finest foreign chocolate and to price the bar very high relative to its cost of production and ingredients. Otherwise, no yuppie would even think of buying it. Part of the expense will require a vast marketing program, complete with endorsements by yuppie heroes, of course.

The project is expected to last eight years, after which time yuppies will be more interested in dentures than candy bars. The introduction of the candy bar requires 20 new machines costing $100,000 each. Installing each machine costs $1000 and the machines will fall into asset class 8 and qualify for a declining balance CCA rate of 20%. The production facility will be located at a site Bergen already owns and that could have been rented for $200,000 per year payable at the end of the year. This site was purchased 5 years ago for $2,000,000 and it belongs to CCA class 3 (CCA rate = 5%). The firm must invest $1 million to convert the facility to the Yuppie Nougat project. The site modification fall into CCA class 13 and it could be depreciated using the straight-line method over 8 years.

Bergen expects to sell 2 million bars per year for the first three years and 1.5 million each year thereafter. The price will be $2.5 per candy bar, with a production cost of $0.50. The marketing expense per bar actually sold is scheduled at $1.00. Outlets have been chosen with yuppies in mind, the aim being to have Yuppie Nougat "available wherever Perrier is sold." Therefore, the firm expects to maintain large inventories of about 500,000 bars on average. Subsequently, total non-cash working capital at the end of each year would be about 8% of sales for that year. When the project is terminated in eight years, the machines should be sold out. Management expects to realize proceeds of $381,262 from the sales of the machines. The formula and name of the product can be sold for $500,000. Furthermore, to use the site again at the end of the project, Bergen will need to restore the site to its present layout. The estimated cash cost of restoring the site is $25,000. Bergen has determined that the appropriate cost of capital for Yuppie Nougat is 18%. Bergen's tax rate is 40%.

Should Bergen conquer the yuppie world with Yuppie Nougat? Why?

Answer rating: 100% (QA)

Bergen should conquer the yuppie world with Yuppie Nougat because The term Yuppie was coined at just about the time the Millennial generation was born Both made the scene about 1980 and in many cases ... View the full answer