Company A is a small firm involved in a wide range of food production. It relies on
Question:
Company A is a small firm involved in a wide range of food production. It relies on significant amounts of grain input, including wheat. The firm is considering launching one of two products labeled A and B. The firm estimates the following:
Product | A | B |
Unit price Unit variable costs Units sold | $100 | $60 |
60% | 30% | |
20500 | 15000 | |
Fixed costs | $570,000 | $300,000 |
Assume that investments in CAPEX are equivalent to fixed costs and investments in working capital amount to $25,000. The project's life is three years following initial investments, and the depreciation expense is estimated at $190,000 annually. The tax rate is 30%. You are an analyst assessing the investment viability of these products and have been tasked to answer the following questions:
- Calculate the break-even quantities and the degree of operating leverage of both products given the above information. Based on the results, which product will you recommend and why.
- The executive board wants to investigate investments for product A further because they have better in-house skills that they may use to produce A. The board has asked you to estimate the NPV associated with producing product A assuming the discount rate is 11%.
- Report the cashflows required to calculate the NPV in a table and report the value of the NPV.
- Based on your calculations, argue whether the firm should produce product A, and if not, how you can make the project appealing to management.
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr