Randy’s" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint ice-cream ", which will include real strawberries. To manufacture the product, Randy’s will have to buy a strawberries processor machine. In addition, since the old ice-cream machine of the company broke down it has to replace it with a new one. Below is the purchasing information of the two machines: - A strawberries processor machine: The machine costs $500,000 and is depreciated in a straight line over 4 years. This machine has a salvage value of $30,000. - A new ice-cream machine: The machine costs $850,000 and is depreciated in a straight line over 5 years. This machine has a scrap (salvage) value of $200,000. Other information: The strawberry mint ice-cream project's estimated lifecycle is 5 years. Randy’s estimates that in the first year the Product will have revenues of $1 million, and then revenues are expected to increase by 12% annually. Production costs are expected to be 60% of the revenues. Marketing costs are expected to be 30% of the revenues in the first year and then after 10% of the revenues in the following years. At the end of year 5, Randy’s estimates that it will be able to sell the strawberries process machine for $120,000. The ice-cream machine will worth 0 and therefore will not be sold. During the last 5 years, Randy’s has spent $20,000 in the development the of the strawberry mint ice cream. To support the project, the Randy’s will need to invest in working capital. The company will need to invest at the beginning of each year in inventory 10% of the expected revenues in the following year, in accounts receivables 25% of the current year’s revenues. Accounts payable will amount to 15% of the cost of goods sold at the beginning of each year. All the working capital will be recovered at the end of the project in 5 years. Randy’s corporate tax is 25% and Capital gain tax is 20%. Randy’s cost of capital is 13%. Should Randy’s undertake the project?
"Randy’s" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint ice-cream ", which will include real strawberries.
To manufacture the product, Randy’s will have to buy a strawberries processor machine. In addition, since the old ice-cream machine of the company broke down it has to replace it with a new one. Below is the purchasing information of the two machines:
- A strawberries processor machine: The machine costs $500,000 and is depreciated in a straight line over 4 years. This machine has a salvage value of $30,000.
- A new ice-cream machine: The machine costs $850,000 and is depreciated in a straight line over 5 years. This machine has a scrap (salvage) value of $200,000.
Other information:
The strawberry mint ice-cream project's estimated lifecycle is 5 years.
Randy’s estimates that in the first year the Product will have revenues of $1 million, and then revenues are expected to increase by 12% annually.
Production costs are expected to be 60% of the revenues.
Marketing costs are expected to be 30% of the revenues in the first year and then after 10% of the revenues in the following years.
At the end of year 5, Randy’s estimates that it will be able to sell the strawberries process machine for $120,000. The ice-cream machine will worth 0 and therefore will not be sold.
During the last 5 years, Randy’s has spent $20,000 in the development the of the strawberry mint ice cream.
To support the project, the Randy’s will need to invest in working capital. The company will need to invest at the beginning of each year in inventory 10% of the expected revenues in the following year, in accounts receivables 25% of the current year’s revenues. Accounts payable will amount to 15% of the cost of goods sold at the beginning of each year. All the working capital will be recovered at the end of the project in 5 years.
Randy’s corporate tax is 25% and
Randy’s cost of capital is 13%.
Should Randy’s undertake the project?
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