Company E is an international soft drinks empire considering and reviewing the investment plans by expanding its operations. The manager of company E expected to launch in the product in place I. It involves the capital outlay of $20 million for building a plant and distribution system. Fixed costs are estimated as $3 million per year and variable costs would be 12% per liter. It expects a return of 25% in nominal dollar terms. The sales of the company have forecasted to be 35% per liter and taxes paid to government at the rate of 30%. Company trying to forecast the sales by following ‘1-2-4’ rule. Product S is the close competitor for Company E product. It would also face the similar costs of Company E. It is also interested to enter into the market place where Company E has trying to establish. To determine: Net present value of proposed project and to know sensitive of NPV to future sales volume.

Question

Want to see the full answer?

Answer 1

Question

Chapter 11, Problem 1MC

Summary Introduction

Case summary:

Company E is an international soft drinks empire considering and reviewing the investment plans by expanding its operations. The manager of company E expected to launch in the product in place I. It involves the capital outlay of $20 million for building a plant and distribution system.

Fixed costs are estimated as $3 million per year and variable costs would be 12% per liter. It expects a return of 25% in nominal dollar terms.

The sales of the company have forecasted to be 35% per liter and taxes paid to government at the rate of 30%. Company trying to forecast the sales by following ‘1-2-4’ rule. Product S is the close competitor for Company E product. It would also face the similar costs of Company E. It is also interested to enter into the market place where Company E has trying to establish.

To determine: Net present value of proposed project and to know sensitive of NPV to future sales volume.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

International energy drink giant Energica America's regional sales manager Will Smith investigate the plans for the Middle East and plans to launch in Azerbaijan in 2021. The market price of the Company's plant in America is determined to be $ 5 million. It causes the company to need a capital of $ 20 million in 2021 to shift the investment to Azerbaijan and to establish a new bottling factory and distribution channel. While the fixed expenses required for production, distribution and marketing as of 2021 are $ 3 million per year, 50 million liters of energy drink will be produced in the country at the end of each year. Variable costs arising from production and distribution will be 12 Cent per liter. According to the policy pursued, the expected minimum return rate of the company is accepted as 6%. The income from sales is expected to be 35 cents per liter. Bottling factories are expected to serve almost forever, so all unit costs and sales revenues are expected to remain constant…

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects that the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%. While Kim expects the cash flows to be $3 million a year, it recognizes that the cash flows could, in fact, be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait 1 year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain…

You are an advisor of Walton Hi-Tech Industry Limited (WHIL), a conglomerate based in Kaliakair, Bangladesh. Demand for your product has been high and you are looking at the following two alternative plans: Plan I: Spend $94 million today on a factory in Bhaluka, Mymensingh that will be completed in 1 year. You expect to receive $40 million in profits from this factory at the end of the second year, at which time you also expect to sell the factory to Sharp Corporation, a Japanese competitor, for a further $70 million. Plan II: Spend $120 million today in a joint venture with Jamuna Electronics. You expect to begin generating yearly profits of $13.5 million at the end of the first year and every year thereafter. You expect the joint venture to last forever. The market interest you could achieve from IDLC Finance if you do not invest in any of the two is 8.5%. Which of the above plans would you undertake if you could undertake just one. Explain this scenario with proper reasoning.