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Delicious Snacks, Inc. is considering adding a new line of candies to its current product line. The company already paid $300K for a marketing research that provided evidence about the convenience of this product at this time. The new line will require an additional investment of $70K in raw materials to produce the candies. The project's life is 7 years and the firm estimates selling 1.5M packages at a price of $1 per unit the first year; but this volume is expected to grow at 17% the next two years, then at 12% for the following two years, and finally at 7% for the last two years of the project. The price per unit is expected to grow at the historical average rate of inflation of 3%. The variable costs will amount 70% of sales and the fixed costs will be $500K. The equipment required to produce the candies will cost $750K, and will require an additional $30K to have it delivered and installed. This equipment has an expected useful life of 7 years and it will be depreciated using the MACRS 5-year class life. After seven years the equipment can be sold at a price of $200K. The firm plans financing the new equipment with 30K semiannual coupon bonds that mature in 30 years, with $1,000 face value, 5% coupon rate, and 12% yield to maturity. The cost of capital is 12% and the firm's marginal tax rate is 40%.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M941277

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