Bliss Bar is a company that sells deluxe chocolate and candy bars based in Illinois. The...

 

Transcribed Image Text:

Bliss Bar is a company that sells deluxe chocolate and candy bars based in Illinois. The company is considering launching a new product line featuring protein bars coated with their deluxe chocolate flavors. Bliss Bar has spent $75,000 developing a new protein bar line as a part of the company's product diversification plan. It also spent another $40,000 for market research on flavors to produce. Based on market research, Bliss Bar expects first year sales of 1,200,000 protein bars at a price of $2.45 per unit with an expected annual growth of 3% in sales volume each year of the six-year project. The variable costs per unit are $0.80, and the annual fixed costs are $30,000. Bliss Bar estimates that the net working capital will be 8% of next year's sales. The launch of this new product line is expected to cannibalize the sales of an existing candy bar, Choco-O! by 10,000 units per year. Choco-O! is sold at a price of $2 per unit and has variable costs of $0.50 per unit. To expand production capacity for this new product line, Bliss Bar is required to have an initial investment of $700,000 in factory equipment. The equipment will be depreciated straight-line for six years and is expected to have no salvage value. The company's tax rate is 20%, and its cost of capital is 7.6%. However, the finance team suggests that the appropriate project discount rate should be higher as the company has no prior experience in making protein bars. The current market premium is 7%, and the risk-free rate is 4%. Bliss Bar's Beta is 1.20, and the project is deemed to be 3 times riskier. What will be the expected cannibalized sales in year 3? Bliss Bar is a company that sells deluxe chocolate and candy bars based in Illinois. The company is considering launching a new product line featuring protein bars coated with their deluxe chocolate flavors. Bliss Bar has spent $75,000 developing a new protein bar line as a part of the company's product diversification plan. It also spent another $40,000 for market research on flavors to produce. Based on market research, Bliss Bar expects first year sales of 1,200,000 protein bars at a price of $2.45 per unit with an expected annual growth of 3% in sales volume each year of the six-year project. The variable costs per unit are $0.80, and the annual fixed costs are $30,000. Bliss Bar estimates that the net working capital will be 8% of next year's sales. The launch of this new product line is expected to cannibalize the sales of an existing candy bar, Choco-O! by 10,000 units per year. Choco-O! is sold at a price of $2 per unit and has variable costs of $0.50 per unit. To expand production capacity for this new product line, Bliss Bar is required to have an initial investment of $700,000 in factory equipment. The equipment will be depreciated straight-line for six years and is expected to have no salvage value. The company's tax rate is 20%, and its cost of capital is 7.6%. However, the finance team suggests that the appropriate project discount rate should be higher as the company has no prior experience in making protein bars. The current market premium is 7%, and the risk-free rate is 4%. Bliss Bar's Beta is 1.20, and the project is deemed to be 3 times riskier. What will be the expected cannibalized sales in year 3?

Answer rating: 100% (QA)

To calculate the expected cannibalized sales in year 3 we need to first determine the t... View the full answer