Ask Corporate Finance Expert

Pistachio, Inc. is thinking of building a bakery to introduce French cookies, so-called macarons, to the Newark market. A preliminary marketing study, which cost $75,000 and which was completed last year, showed a significant demand for macarons in the Newark area. The bakery is expected to last for 25 years. Its initial cost is $175,000. This cost can be depreciated over 15 years using straight line depreciation. The salvage value of the equipment in the bakery after 15 years is $20,000 in real terms. After 15 years the bakery can be renovated. The cost of renovation will be $50,000 in real terms and can be depreciated (again using straight line depreciation) over the remaining 10 years of the bakery's life. The salvage value of the equipment after the remaining 10 years will be $10,000 in real terms. The land the bakery is built on could be rented out for $12,500 a year in real terms for 25 years.

The bakery will be able to produce 75,000 macarons a year. The price of a macaron is currently $1.55. It is expected to grow at a rate of 5% per year in real terms for the first 2 years, then at 2% per year in real terms for 4 years and finally stays the same in real terms thereafter for the remainder of the bakery's life. Pistachio, Inc. expects to be able to sell all the macarons that it can produce. The basic ingredients for a macaron currently (t = 0) cost $0.25. These costs are expected to grow by 1% in real terms through the lifetime of the project. The labor required to operate the bakery is expected to cost a total of $45,000 dollars in nominal terms in t = 1 and this is expected to increase at 4% in real terms thereafter. There is no working capital requirement. The rate of inflation is expected to be 3% per year for the remainder of the bakery's life. The firm's total tax rate including local taxes is 36 percent. Pistachio, Inc. expects to make substantial profits on its other products so that it can offset any losses on the bakery for tax purposes. Its opportunity cost of capital for projects of this type is 11% in nominal terms.

Questions:

1. Construct two spreadsheets in EXCEL to find the NPV of the macarons project. One spreadsheet should be in nominal terms and one spreadsheet should be in real terms. The two spreadsheets should give the same value for the NPV. Should the firm build the bakery or not?

2. Do a sensitivity analysis by varying by plus and minus 10% the
a) initial labor cost (holding everything else constant)
b) initial cost per macaron (holding everything else constant)
c) quantity sold (holding everything else constant)
d) price per macaron (holding everything else constant)

Corporate Finance, Finance

  • Category:- Corporate Finance
  • Reference No.:- M9222112

Have any Question?


Related Questions in Corporate Finance

Business finance case study assignment -instructions - you

BUSINESS FINANCE CASE STUDY ASSIGNMENT - Instructions - You must do Questions 1-5a, 8 and 10 on a spreadsheet. Eternal Youth Ltd (EY) is a New Zealand company which produces and sells cosmetics. Its financial year is 1 J ...

Q1 delta hedgingon sept 30th 2011 exxon mobil xom stock was

Q1 (Delta Hedging) On Sept 30th, 2011, Exxon Mobil (XOM) stock was traded at $72.63 while the December XOM put option with $75 exercise price is traded at $5.00 and the December XOM call option with $70 exercise price is ...

Q1 delta hedgingon sept 30th 2011 exxon mobil xom stock was

Q1 (Delta Hedging) On Sept 30th, 2011, Exxon Mobil (XOM) stock was traded at $72.63 while the December XOM put option with $75 exercise price is traded at $5.00 and the December XOM call option with $70 exercise price is ...

Assignment -part a - saturn petcare australia and new

Assignment - Part A - Saturn Petcare Australia and New Zealand is Australia's largest manufacturer of pet care products. Saturn have been part of the Australian and New Zealand pet care landscape since opening their firs ...

Mini case assignment -problems - use internet to identify a

Mini Case Assignment - Problems - Use internet to identify a house or condo that you may be interested in investing as a rental property for 10+ years. (Suggested price range between $250k - $1 million) 1. Estimate the a ...

Descriptionstudents are required to study undertake

Description: Students are required to study, undertake research, analyse and conduct academic work within the areas of corporate finance. The assignment should examine the main issues, including underlying theories, impl ...

Corporate finance assignment - required this assessment

Corporate Finance Assignment - Required: This assessment task is a written report and analysis of the financial performance of a selected company in order to provide financial advice to a wealthy investor. It will be bas ...

Interest swap valueabc bank has agreed to receive 3-month

Interest swap value ABC bank has agreed to receive 3-month LIBOR and pay 8% per annum on a notional principal of $100 million. The swap has a remaining life of 11 months. The LIBOR spot rates for 2-month, 5-month, 8-mont ...

Graph an event study relationshipthe event in consideration

Graph an event study relationship. The event in consideration here is: "Environmental performance, being green, clean-tech, corporate sustainability, and many other "green" issues are on the forefront of the current econ ...

Question - assume that the average firm in your companys

Question - Assume that the average firm in your company's industry is expected to grow at aconstant rate of 6 percent and its dividend yield is 7 percent. Your company is about as risky as the average firm in the industr ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As