Budweiser is thinking about making wine

Expected sales per unit o 260,000 bottles sold in the first year o Sales revenue declines 10% per year (ie, sales growth = -10%)

Proposed selling price per bottle = $5.20

Variable cost per bottle = $2

Fixed costs = $250K/year in maintenance and labor

Budweiser also expects to lose $300K pretax per year (revenue net of expenses) from beer sales as people switch from beer to wine

Working capital necessary = $50K

Wine-making equipment o would cost $750K, plus $50K in modifications required on the assembly line (included in depreciable basis)

o depreciated 5-year MACRS

After five years, project ends as everyone realizes Budweiser wine is disgusting o all remaining working capital recouped o wine-making equipment sold for $400,000

Tax rate = 30%

Assume any negative taxes can be treated as an immediate tax credit. (=treat negative taxes as a positive CF.)

Required return = 10%.

On Excel, calculate the NPV and the IRR of the project. Should the company pursue this project?