BubblyCo is currently evaluating a new carbonated orange juice product called Bubblo Soda that is superior to
Question:
BubblyCo is currently evaluating a new carbonated orange juice product called Bubblo Soda that is superior to competing orange products. The company has finished a market study that shows promising sales for the new product. The cost of the marketing study was $5,000. Machinery with an estimated cost of $100,000 will be purchased to manufacture the soda. BubblyCo's inventories of row material would have to be increased by $30,000 at the time of the initial investment. The machinery has a CCA rate of 25% and it is expected to have a salvage value of $48,000 after 2 years of use and at the same time the inventories of row material will be liquidated.
BubblyCo's management expects to sell 200,000 bottles of the new product in each of the next 2 years at a price of $2.00 per bottle, but $1.50 per bottle would be needed to cover fixed and variable operating costs. BubblyCo's tax rate is 40%, and the overall cost of capital is 10%.
1. What is the initial cash flow of the project?
2. What is the Operating Cash flow in year 1?
3. What is the present value (at the end of the second year) of the remaining CCA tax shields in the years following the end of the project?
International Business
ISBN: 9781292274157
8th Edition
Authors: Simon Collinson, Rajneesh Narula, Alan M. Rugman