A beauty product company is developing a new fragrance product named Scent Forever. The company has already
Question:
A beauty product company is developing a new fragrance product named Scent Forever. The company has already invested $30,000 in researching whether there is market demand for this product. To start producing the new product they will need to spend $10,000,000 today. The additional yearly sales of Scent Forever are expected to be 450,000 bottles for the next 5 years starting at the end of year 1, which will sell at a price of $80 dollars each and the variable cost is expected to be $30 per bottle. Fixed production costs resulting from the new product will be $1 million per year, and depreciation costs associated with the new product are $1.2 million per year. If the company goes ahead with the new product this will reduce the revenues of its existing fragrances by $13,770,000 per year. Working capital for the new product is an outlay of $2,000,000 today which will be recovered at the end of year 5. Assume that the tax rate is 30 percent and the cost of capital is 10%.
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates