Launch	Proj Yr 1	Proj Yr 2	Proj Yr 3	Proj Yr 4	Proj Yr 5
Initial Investment
Incremental sales
Incremental COGS
Incremental gross profit
Depreciation	6
Marketing and R&D	$700,000
Partial case returns net of salvage value	$1,800,000
label conversion costs
Frieght charge/launch year expenses
other miscellaneous
incremental expenses
cost reductions from new design
incremental operating profit
related taxes
after tax impact on profits
depreciation
project cash flows

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Case Study:

The U.S. skincare market has been growing at an average rate of 4% over the past three years and is estimated to reach $11 billion in 2018.

The new packaging would require the purchase of molds and assembly equipment (useful life of six years on all) as follows: Cap/Pump molds $1,590,000 Change part 260,000 Pump assembly 570,000 In addition, the firm will incur start-up expenses related to partial case returns and other items. It is assumed that major customers will be able to manage down their inventory levels with the assistance of the transitions team. Minimal returns will come from large retailers including WalMart and Kmart due to their quick inventory turnover. It is anticipated that most returns will come from drug retailers as they shift products to the new packaging and remove unsold product from the shelves. Partial case returns net of salvage value $1,800,000 Label conversion costs 700,000 Freight charge/launch year expenses 400,000 Other miscellaneous 300,000 The redesign calls for cutting SKU's from 79 to 49. No volume loss is anticipated from this since the transition team will actively manage shelf space on a customer-by-customer basis to minimize loss of shelf presence. The SKU reduction is estimated at $119,000 per year since the new package design is less expensive per unit. The brand's current long-term strategic role is to maintain share and grow at category levels. Sales in the most recent year were $139.5 million. Without the redesign, sales are forecast to remain flat at historic levels. With the redesign, management believes that sales can grow at the rate of the skincare categoryforecast at 4% per year for the next five yearsand there will also be incremental growth related to recovery of market share of 2% in Year 1, 1% in Year 2, 0.5% in Year 3, and 0% thereafter. The gross margin will remain at 69% of net sales. The incremental marketing and development cost is a one-time $700,000 for market research and development. Management thought the project should be evaluated using a discount rate of 7% based on the firm's weighted average cost of capital (WACC) and the perceived riskiness of the project. The tax rate is 27%.

The current gross margin of the product is 69%.