Nacirema Desserts Inc. has developed a new ice cream machine, the Coldplay Shiver, that is rarely out

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Question:

Nacirema Desserts Inc. has developed a new ice cream machine, the Coldplay Shiver, that is rarely out of service (unlike the one at your favorite local burger joint).

Nacirema’s finance department believes that demand will be strong for the new machine, so they are working on a feasibility study.

To manufacture an initial run of this machine, the firm will invest $750,000 for manufacturing equipment, which should last six years, with straight-line depreciation and no salvage value. The tax rate would be 30%. The initial selling price for a Coldplay Shiver is expected to be $12,000. Expected variable cost per Shiver is $5000. Expected fixed costs, such as rent, utilities, and salaries, but excluding tax-deductible depreciation expense, would be $250,000 per year.

Address the following questions independently from one another. Refer to the original information given in the paragraphs above to answer each.

a. Determine the number of unit sales needed for a breakeven operating profit.

b. Assuming you could sell 60 Shivers per year, what would be the net present value at a 15% discount rate?

c. Is your NPV decision in (b) consistent or inconsistent with the breakeven finding in (a)? Explain why.

d. Assuming you could sell 60 Shivers per year, what would be the payback period for the initial investment?

e. Assuming you could sell 60 Shivers per year, what would be your internal rate of return (IRR)?

f. Assuming you could sell 60 Shivers per year, what would your selling price have to be to generate a net present value of $150,000 at a 15% discount rate?

g. If you could sell 60 Shivers in the first year and your sales volume increased by 5% each year until the end of Year six, what would the net present value be at a 15% discount rate?

h. Considering your answers to the previous questions, is this project an acceptable investment? Explain why.