Simmonds Products has spent $158,500 (sunk cost) on research to develop low-fat imitation wine. The firm is
Question:
Simmonds Products has spent $158,500 (sunk cost) on research to develop low-fat imitation wine. The firm is planning to spend $210,000 on a machine to produce new wine. Shipping cost of $60,000 and installation costs of $40,000 for the machine will be capitalized and depreciated via straight-line over 7 years. Inventory levels will increase by $30,000, accounts receivables will increase by $20,000, while account payables will increase by $17,000. The required rate of return is 14 percent, the tax rate is 35 percent and ROE is 18 percent. Earnings Before Interest and Taxes, EBIT, is expected to be $350,000 per year for years 1 through 7. Find the initial investment for the imitation low-fat wine project.
Finance Applications and Theory
ISBN: 978-0077861681
3rd edition
Authors: Marcia Cornett, Troy Adair