You run a profitable conglomerate that is considering a long-term pop-up investment into the $1 billion (annual

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Question:

You run a profitable conglomerate that is considering a long-term pop-up investment into the $1 billion (annual revenue) gelato market. You spent $2 million to obtain the following data. Because of your firm's power you could instantaneously capture 4.8% market share. In addition, this business will have an impact on your firm's current sales. You project that your current non-food sales would increase 5% from its current figures with this venture; current plans not involving Gelato would have only led to an increase of 1% in sales. On the other hand, this business will cannibalize your existing food sales by 1%. COGS are always 40% across all businesses. And Net Working Capital is always 10% of sales.

Note that all annual figures occur at year end and are flat over the five year life of your investment while immediate costs occur at time 0. In order to achieve these figures, you will need to invest $60 Million up-front in equipment. $10 Million of this will be expensed and the remaining $50 Million will be straight-line depreciated over five years. You believe you can salvage 10% of your investment in this equipment when you close the pop-up five years from now. You had planned on this project three years ago by buying some equipment for $4 million and have been depreciating the asset with a four year schedule so there is only one depreciation write-off remaining that you will take this year.

If you decided against the project, you would sell the equipment for $1 million right now. There is an additional operating expense of $4 million annually. And, headquarters plans to charge a $3 million overhead allocation but you realize that only $1 million of this is variable that this project has impact on with the remaining $2 million being fixed overhead

There are no other changes in revenues or costs. These numbers are the expected figures for each year throughout the 5 year life of the project. The IRS assigns a Corporate Tax Rate of 40%. Market Risk Premium is 6.

You also have the following financial data

Treasury

Security Rate

3-month T-bill 2%

5-year T-bond 3%

30-year T-bond 5%

AA Corporate Bonds 6%

Given an appropriately borrowed 20% leverage at your current bond rating to fund this project, Show whether you should invest using DCF analysis. Provide detailed calculations?