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Budweiser is thinking about making wine… Expected sales per unit 230,000 bottles sold in the first...

Budweiser is thinking about making wine…

  • Expected sales per unit
    • 230,000 bottles sold in the first year. Sales revenue declines 10% per year (ie, sales growth = -10%)
  • Proposed selling price per bottle = $5.10. Variable cost per bottle = $2
  • Fixed costs = $230K/year in maintenance and labor
  • Budweiser also expects to lose $300K pretax per year (revenue net of expenses) from beer sales as people switch from beer to wine
  • Working capital necessary = $50K
  • Wine-making equipment would cost $750K, plus $50K in modifications required on the assembly line (included in depreciable basis)
    • depreciated 5-year MACRS
  • After five years, project ends as everyone realizes Budweiser wine is disgusting all remaining working capital recouped
    • wine-making equipment sold for $400,000
  • Tax rate = 30%
  • Assume any negative taxes can be treated as an immediate tax credit. (=treat negative taxes as a positive CF.)

Required return rate = 10%. Calculate the NPV and the IRR of the project. Should the company pursue this project?

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jeff jeffy answered 1 year ago
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