Question

Florida Farms (FFC) is considering producing a new fruit juice, Elite. FFC has spent two years developing this product. FFC has also test-marketed Elite, spending a token sum to conduct consumer surveys and tests of the product in 30 states.

Based on the previous fruit juice products and the results in the test marketing, management believes consumers will buy 4 million packages each year for five years at 50 cents per package, Equipment to produce Elite will cost FFC $500,000, and $150,000 of additional net working capital will be required to support Elite sales. FFC expects production costs to average 30% of Elite's net revenues, with fixed overheads & sales expenses totaling $262,000 per year. The equipment has a life of five years after which time it will have no salvage value. Working capital is assumed to be fully recovered at the end of five years. Depreciation is straight-line (no salvage) and FFC 's tax rate is 45%. The required rate of return for a similar risk is 8%.

Should Florida Farms produce this new fruit drink? Apply the NPV method as the basis of your analysis and recommendation.

Answer 1

Answer:

Yes,

Florida Farms should produce this new fruit drink. NPV of the project is positive.

NPV of the Project = $2,130,796.64

Working: