Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The initial...

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Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The initial cost of the assets is $90 million, and the company's working capital would increase by $20 million during the life of the new product. The new product is estimated to have a useful life of four years, at which time the assets would be sold for $15 million. Management expects company sales to increase by $120 million the first year, $160 million the second year, $140 million the third year, and then trailing to $50 million by the fourth year because competitors have fully launched competitive products. Operating expenses are expected to be 60% of sales, and depreciation is based on an asset life of three years under MACRS (modified accelerated cost recovery system). The MACRS deprecation schedule is Year 1: 33.33%. Year 2: 44.45%. Year 3: 14.81%. Year 4: 7.41%. Assume the required rate of return on the Vitamin-Burger project is 10% and the company's tax rate is 35%. Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The initial cost of the assets is $90 million, and the company's working capital would increase by $20 million during the life of the new product. The new product is estimated to have a useful life of four years, at which time the assets would be sold for $15 million. Management expects company sales to increase by $120 million the first year, $160 million the second year, $140 million the third year, and then trailing to $50 million by the fourth year because competitors have fully launched competitive products. Operating expenses are expected to be 60% of sales, and depreciation is based on an asset life of three years under MACRS (modified accelerated cost recovery system). The MACRS deprecation schedule is Year 1: 33.33%. Year 2: 44.45%. Year 3: 14.81%. Year 4: 7.41%. Assume the required rate of return on the Vitamin-Burger project is 10% and the company's tax rate is 35%.

Answer rating: 100% (QA)

To determine whether the VitaminBurger project is a good investment for the company we need to calcu... View the full answer