As an owner of a chocolate factory, you are considering an investment in the production of...
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As an owner of a chocolate factory, you are considering an investment in the production of a new candy bar called Coconut Freedom. The introduction of the candy bar requires an investment in 400 new machines costing $10,000 each. Installing each machine costs an additional $2,000. The machines will be depreciated over the four years of project's life based on the following schedule: year 1: 33.33%; year 2: 44.45%; year 3: 14.81%; year 4: 7.41%. The life of the project is estimated to be 4 years, after which each machine will be sold for $1,000 at the end of year 4. The project also requires an immediate investment in net working capital in the amount of $500,000, which will be fully recovered at the end of year 4. To evaluate the appeal of Coconut Freedom to consumers, you have already completed a pilot tasting experiment, which cost you $100,000. You expect to sell 2,000,000 chocolate bars each year during the project's life at the price of $2.50 per bar. Production costs are estimated to be $0.50 per candy bar. In addition to these variable costs, you expect to incur $1,000,000 per year in advertising expenditures to support the sales of Coconut Freedom. Finally, the results of your study indicate that the introduction of Coconut Freedom will cannibalize the sales of other chocolate bars currently produced by your firm and erode their combined after-tax cash flow by $200,000 per year. All cash flows occur at year-end. The discount rate is 15% and the tax rate is 20%. Compute the NPV for this project. Should the company go ahead with this investment? As an owner of a chocolate factory, you are considering an investment in the production of a new candy bar called Coconut Freedom. The introduction of the candy bar requires an investment in 400 new machines costing $10,000 each. Installing each machine costs an additional $2,000. The machines will be depreciated over the four years of project's life based on the following schedule: year 1: 33.33%; year 2: 44.45%; year 3: 14.81%; year 4: 7.41%. The life of the project is estimated to be 4 years, after which each machine will be sold for $1,000 at the end of year 4. The project also requires an immediate investment in net working capital in the amount of $500,000, which will be fully recovered at the end of year 4. To evaluate the appeal of Coconut Freedom to consumers, you have already completed a pilot tasting experiment, which cost you $100,000. You expect to sell 2,000,000 chocolate bars each year during the project's life at the price of $2.50 per bar. Production costs are estimated to be $0.50 per candy bar. In addition to these variable costs, you expect to incur $1,000,000 per year in advertising expenditures to support the sales of Coconut Freedom. Finally, the results of your study indicate that the introduction of Coconut Freedom will cannibalize the sales of other chocolate bars currently produced by your firm and erode their combined after-tax cash flow by $200,000 per year. All cash flows occur at year-end. The discount rate is 15% and the tax rate is 20%. Compute the NPV for this project. Should the company go ahead with this investment?
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Answer rating: 100% (QA)
SOLUTION To calculate the NPV of the project we need to calculate the cash flows for each year of the projects life and discount them to their present ... View the full answer
Related Book For
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart
Posted Date:
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