Additional diversification to product line

Reference no: EM13821128

Given that its food packaging customers have been inquiring about its ability to supply complementary products, Apex is considering coffee packaging as an additional diversification to its product line. You are able to catch James in Luke's office and stop in to ask for their reaction to the query.

"Hi," you say. "I've got a quick question for you both. May I interrupt for just a minute?"

"Sure," says Luke. "What's up?"

"I need to calculate the net present value (NPV) for the coffee packaging project-the coffee packaging production equipment and a lamination machine that will bond plastic substrates for airtight quality. Does the coffee packaging line make sense for us?"

"The process will be challenging, initially," says Luke. "But once our employees acclimate, I anticipate a very efficient process. I'm certain we will be competitive in this industry."

"I can definitely leverage the customers within the channels of distribution that we intend to reach with our food packaging line," says James. "Many of them distribute coffee products. I also see an opportunity for snack-food packaging, which requires metalized lamination. This packaging can also be applied to health products such as antibacterial cloths. The possibilities are endless! Let's try to make this work."

"Thank you, both," you say. "Would you get me the same type of information you gave me for the expansion project so that I can compute the cash flows?"

James laughs and says, "We anticipated this question!" Luke and I were just putting our information in an e-mail to you. You should have it by the time you get back to your office."

"Thanks so much!" you say. "I knew I could count on you."

Back in your office, the promised e-mail is in your Inbox. Now you can compute the cash flows given the following information:

Initial investment outlay of $20 million for equipment only
Project and equipment life: 5 years
Sales projected tobe $12 million per year for 5 years.
Assume gross margin of 50% (exclusive of depreciation)
Depreciation: Straight-line for tax purposes
Selling, general, and administrative expenses: 10% of sales
Tax rate: 35%

As I started wondering if this coffee packaging project will maximize the firm's value I said to myself, I'll compute the NPV and see what it looks like and I will use a weighted average cost of capital (WACC) of 5% as reflected in the attached Week 5 NPV IRR.

Reference no: EM13821128

Questions Cloud

Determine the present values : Determine the present values if $5,000 in the future (i.e., at the end of each indicated time period) in each of the following situations:

Abstract about stomata : Abstract about stomata- How to write an abstract: A short description of how the experimental factor affects isopods

How might the use of addictions assessment tools differ : How might the use of addictions assessment tools differ from the use of clinical assessment tools? Include in your response references to unique administration and client considerations.

Additional diversification to product line : Given that its food packaging customers have been inquiring about its ability to supply complementary products, Apex is considering coffee packaging as an additional diversification to its product line. You are able to catch James in Luke's office..

Identify the successful partnerships and collaborations : Describe the leadership qualities the parties possessed that made these partnerships successful - Compare the mission and vision of the partners. Include how the agencies complemented each other.

What are services provided by the healthcare delivery system : What are the services provided by the healthcare delivery system. What are the current trends contributing to the high ranking and the future path of this health care organization

What are some of advantages of a self-pay collections method : What are some of the advantages and disadvantages of a ‘self-pay' collections method?

Research cost escalation : Use the Internet or Databases to research "cost escalation" within the health care segment. Next, determine one (1) key driver of health care cost escalation. Indicate one (1) strategy health care managers can implement to reduce costs in the futu..

User Account

All Pages