A Cookie Company has negotiated to introduce a new cookie for 6 years. The cookie would be purchased in boxes from a manufacturer for $100 per box and sold to supermarkets for $200 per box. Annual sales is expected to be 5 000 boxes. The estimated annual cash expenses to sell the new product would be $180,000. The cost of the equipment to package the cookies is $300 000, and the working capital needed is $400 000. After 5 years, the equipment will need to be repaired and maintained at a cost of $25 000. After 6 years, the residual value of equipment will be $50 000. The working capital would be released at the end of 6-year period. The rate of discount of the company is 16%. Required: Compute net present value (NPV) of the new product. Do not compute income tax. Would you recommend the company proceed with this new venture?
A Cookie Company has negotiated to introduce a new cookie for 6 years. The cookie would be purchased in boxes from a manufacturer for $100 per box and sold to supermarkets for $200 per box. Annual sales is expected to be 5 000 boxes. The estimated annual cash expenses to sell the new product would be $180,000. The cost of the equipment to package the cookies is $300 000, and the working capital needed is $400 000. After 5 years, the equipment will need to be repaired and maintained at a cost of $25 000. After 6 years, the residual value of equipment will be $50 000. The working capital would be released at the end of 6-year period. The rate of discount of the company is 16%. Required: Compute net present value (NPV) of the new product. Do not compute income tax. Would you recommend the company proceed with this new venture?
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 13P
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A Cookie Company has negotiated to introduce a new cookie for 6 years. The cookie would be purchased in boxes from a manufacturer for $100 per box and sold to supermarkets for $200 per box. Annual sales is expected to be 5 000 boxes. The estimated annual cash expenses to sell the new product would be $180,000. The cost of the equipment to package the cookies is $300 000, and the working capital needed is $400 000.
After 5 years, the equipment will need to be repaired and maintained at a cost of $25 000. After 6 years, the residual value of equipment will be $50 000. The working capital would be released at the end of 6-year period. The rate of discount of the company is 16%.
Required:
- Compute
net present value (NPV) of the new product. Do not compute income tax. - Would you recommend the company proceed with this new venture?
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