Question

In: Finance

Hamburgers is considering introducing a new vegetarian and guacamole hamburger entrée in its food trucks. It...

Hamburgers is considering introducing a new vegetarian and guacamole hamburger entrée in its food trucks. It will cost $50,000 and take 1 year to develop and test the new recipe.  If the test marketing isn't successful, then HH will abandon the idea (probability 40% ). If the test marketing is successful (probablity 60%) then 1 year from now HH will invest another $100,000 in upgrading its fleet of food trucks to sell this new hamburger. This upgrade will take a year to complete. If HH decides to sell the hamburgers then if it is well-accepted by the market, cash flows will be $20,000 per year for 5 years (probablity = 70%). These cash flows will start in Year 2. If the new hamburger is not well-accepted, the cash flows will only be $5,000 per year for 5 years, starting in Year 2. However if after the first year of poor sales HH doesn't want to continue selling the new hamburgers, it can sell the secret recipe to its competitor for $20,000 and no longer sell the hamburgers. The cash flow from this sale would occur at the end of Year 2. HH's cost of capital is 10.0%.

What is the joint probability that HH will end up receiving $20,000 per year for its hamburger sales?                                                                                    

What is the NPV of the branch of the decision tree in which HH starts selling hamburgers, finds out they aren't successful and then can sell the recipe if it wants to?   

Solutions

Expert Solution

Joint Probability of Receiving $20,000 per year for 5 years 0.42 (0.7*0.6)
Cash Flow at the end of year 2 $25,000 (5000+20000)
Probability of cash flow 0.18 (0.3*0.6)
Expected cash flow in Year 2 $4,500 (25000*0.18)
Present Value (PV) of Cash Flow:
(Cash Flow)/((1+i)^N)
i=Discount Rate=Cost of capital=10%= 0.1
N=Year of Cash Flow
PV1 Present value of expected cash flow in year2 $3,719 (4500/(1.1^2)
Expected cash flow in year 1 ($60,000) (-100000*0.6)
PV2 Present value of expected cash flow in year1 ($54,545) (-60000/1.1)
PV3 Present Value of initial investment ($50,000)
PV1+PV2+PV3 Net Present Value (NPV) -$100,826


Related Solutions

Whole Body Foods is a health food and supplement company. They are considering introducing a new...
Whole Body Foods is a health food and supplement company. They are considering introducing a new health food product into the market. Along the way, Whole Body Foods has received information from their marketing, finance, engineering, and accounting departments. The following information has been accumulated relating to this project. A customer survey was used to determine if this product would have market interest. The cost of the survey was $25,000. The project will require the purchase of $900,000 of equipment...
suppose bmw is introducing a new line of small trucks they are in the process of...
suppose bmw is introducing a new line of small trucks they are in the process of developing their advertising campaign describe what appeal you would use pick two executional styles and describe how you would use them
A hamburger chain sells large hamburgers. When we take a sample of 40 hamburgers and weigh​...
A hamburger chain sells large hamburgers. When we take a sample of 40 hamburgers and weigh​ them, we find that the mean is 0.52 pounds and the standard deviation is 0.3 pound. Technology Output N 40 Mean 0.52   STDEV. 0.3000 One-Sample T SE Mean 0.0474 95% CI ​(0.4241, 0.61590) a. A technology input menu for calculating a confidence interval requires a sample​ size, a sample​ mean, and a sample standard deviation. State how you would fill in these numbers. Sample...
Jim bob Co. is considering replacing its existing fleet of trucks with new trucks. Estimates for...
Jim bob Co. is considering replacing its existing fleet of trucks with new trucks. Estimates for the next three years are as follows: Old trucks New trucks Average annual sales $500,000 $520,000 Annual operating costs 100,000 75,000 Original costs of old trucks 100,000 -- Remaining book value of old trucks 10,000 -- List price of new trucks -- 120,000 Remaining life 3 years -- Expected life -- 3 years Disposal value now $10,000 --- Disposal value in 3 years $...
A hamburger joint took in $634.70 and sold (a combination of hamburgers and cheeseburgers) for a...
A hamburger joint took in $634.70 and sold (a combination of hamburgers and cheeseburgers) for a total of 650 burgers. Hamburgers cost $.89 and cheeseburgers cost $1.09. How many of each were sold?
Introducing a new product, profitability Santos Company is considering introducing a new compact disc player model...
Introducing a new product, profitability Santos Company is considering introducing a new compact disc player model at a price of $105 per Direct materials cost $3,600,000 Direct labor cost $2,400,000 Variable manufacturing overhead $1,200,000 Sales commission 10% of sales Fixed cost $2,000,000 information based on an estimate of 120,000 units of sales annually for the new product: The sales manager expects the introduction of the new model to result in a reduction in sales of the existing model from 300,000...
Jamal views hamburgers and hamburger buns as perfect complements in his consumption, and the corners of...
Jamal views hamburgers and hamburger buns as perfect complements in his consumption, and the corners of his indifference curves follow the 45-degree line. Suppose the price of hamburgers is $10 per package (6 hamburgers ), the price of buns is $3 per package (8 hamburger buns), and Jamal's budget is $50 per month. What is his optimal choice under this scenario?     A. 4 packages of hamburgers and 3 packages of buns B. 3 packages of hamburgers and 4 packages of...
A fast-food restaurant determines the cost and revenue models for its hamburgers. A fast-food restaurant determines...
A fast-food restaurant determines the cost and revenue models for its hamburgers. A fast-food restaurant determines the cost and revenue models for its hamburgers. C = 0.8x + 7100,     0 ≤ x ≤ 50,000 R = 1 10,000 (66,000x − x2),     0 ≤ x ≤ 50,000 (a) Write the profit function for this situation. P =   (b) Determine the intervals on which the profit function is increasing and decreasing. (Enter your answers using interval notation.) increasing     decreasing     (c) Determine how many hamburgers...
You are the CFO and are considering introducing a new product that will require an initial...
You are the CFO and are considering introducing a new product that will require an initial investment in equipment of $6 million. The equipment will be depreciated straight line over 3 years to a value of zero, and can be sold after 3 years for $500,000. Working capital at each date must be maintained at a level of 10% of the following year’s forecast sales. You estimate production costs at $1.50 /unit and the sales price at $4/unit. Sales forecasts...
Norister Inc. is considering introducing a new product line. This will require the purchase of new...
Norister Inc. is considering introducing a new product line. This will require the purchase of new fixed assets of $2.4 million. The company estimates that demand for the new product will be approximately 15,000 units per year, with a price per unit of $100. The variable cost of producing each unit of the product is $35, and fixed costs per year will be $100,000. Demand for the product will remain constant for six years, after which both demand and production...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT