Question
In: Finance
Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The initial...
Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The initial cost of the assets is $105 million, and the company’s working capital would increase by $13 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 $16 million.
Management expects company sales to increase by $140 million the first year, $175 million the second year, $155 million the third year, and then trailing to $65 million by the fourth year because competitors have fully launched competitive products. Operating expenses are expected to be 70% of sales, and depreciation is based on an asset life of three years under MACRS (modified accelerated cost recovery system): Year 1: 33.33%, Year 2: 44.45%, Year 3: 14.81% and Year 4: 7.41%.
If the required rate of return on the Vitamin-Burger project is 8% and the company's tax rate is 30%, should the company invest in this new product? Why or why not?
Solutions
jeff jeffy answered 7 months agoRelated Solutions
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 14%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of
equipment needed
$
140,000
Working
capital needed
$
62,000
Overhaul of
the equipment in two years
$
9,000
Salvage
value of the equipment in four years
$
13,000
Annual
revenues and costs:
Sales
revenues
$
270,000
Variable
expenses
$
130,000
Fixed...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 18%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
160,000
Working capital needed
$
66,000
Overhaul of the equipment in year two
$
11,000
Salvage value of the equipment in four years
$
15,000
Annual revenues and costs:
Sales revenues
$
310,000
Variable expenses
$
150,000
Fixed out-of-pocket...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 18%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
160,000
Working capital needed
$
66,000
Overhaul of the equipment in year two
$
11,000
Salvage value of the equipment in four years
$
15,000
Annual revenues and costs:
Sales revenues
$
310,000
Variable expenses
$
150,000
Fixed out-of-pocket...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 18%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
265,000
Working capital needed
$
88,000
Overhaul of the equipment in year two
$
8,000
Salvage value of the equipment in four years
$
14,000
Annual revenues and costs:
Sales revenues
$
440,000
Variable expenses
$
215,000
Fixed out-of-pocket...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 15%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost
of equipment needed
$
145,000
Working capital needed
$
63,000
Overhaul of the equipment in two years
$
9,500
Salvage value of the equipment in four years
$
13,500
Annual revenues and costs:
Sales revenues
$
280,000
Variable expenses
$
135,000
Fixed out-of-pocket...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an
opportunity to manufacture and sell a new product for a four-year
period. The company’s discount rate is 17%. After careful study,
Oakmont estimated the following costs and revenues for the new
product:
Cost of equipment needed
$
190,000
Working capital needed
$
69,000
Overhaul of the equipment in two years
$
6,000
Salvage value of the equipment in four years
$
16,500
Annual revenues and costs:
Sales revenues
$
340,000
Variable expenses
$
165,000
Fixed...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 17%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
165,000
Working capital needed
$
67,000
Overhaul of the equipment in year two
$
10,000
Salvage value of the equipment in four years
$
13,000
Annual revenues and costs:
Sales revenues
$
320,000
Variable expenses
$
155,000
Fixed out-of-pocket...
Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period....
Winthrop Company has an opportunity to manufacture and sell a
new product for a five-year period. To pursue this opportunity, the
company would need to purchase a piece of equipment for $125,000.
The equipment would have a useful life of five years and zero
salvage value. It would be depreciated for financial reporting and
tax purposes using the straight-line method. After careful study,
Winthrop estimated the following annual costs and revenues for the
new product:
Annual revenues and costs:...
A company is developing a new product. The development of the product requires an initial investment...
A company is developing a new product. The development of the
product requires an initial investment of $160,000 with further
investments of $90,000 in year 1, $60,000 in year 2 and $10,000 in
year 3. The company will launch the product on the market in year 3
and the company expects annual profits of $60,000 from year 3 to
year 7. At the end of year 7, the company expects to terminate the
production line and sell it to a...
Suppose a company has proposed a new 4-year project. The project has an initial outlay of...
Suppose a company has proposed a new 4-year project. The project
has an initial outlay of $25,000 and has expected cash flows of
$7,000 in year 1, $9,000 in year 2, $12,000 in year 3, and $13,000
in year 4. The required rate of return is 11% for projects at this
company. What is the net present value for this project? (Answer to
the nearest dollar.)
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