Hocus Pocus Company wants to increase sales by adding a new product line. The company is considering three different projects. However, its capital budget is limited to $1,500,000. In addition, the company requires a rate of return of 10%. The information concerning the three product lines is given below.

Notes: Assume all amounts stated on the budgeted income statement are cash items. The total capital budget is limited to $1,500,000.

		Broomsticks	Magic Wands	Crystal Balls
Net initial investment		$ 1,175,000	$ 1,000,000	$ 2,200,000
(Budgeted Income Statement for the next 5 years)
Sales		$ 500,000	$ 450,000	$ 650,000
Cost of Goods Sold		$ 80,000	$ 50,000	$ 32,000
Gross Margin		$ 420,000	$ 400,000	$ 618,000
Marketing and Administrative Expenses		$ 100,000	$ 130,000	$ 22,000
Net income		?	?	?

Part a) Determine the net present value for each project assuming all cash flows cease after five years.

Part b) Which project should Hocus Pocus invest in and why?

Part c) If Hocus Pocus had a capital budget limit of $2,300,000, how should they invest it?