Reference no: EM132903593

Question - To capitalize on consumers' concerns about healthful food, Specific Foods, Inc., is considering a new cereal, Veggie Crisp, which contains small bits of cooked vegetables with bran flakes. As part of its cash flow analysis, the finance department has made the following forecasts of demand and cost:

a. Sales revenue for year one will be $200,000 and increase to $1,000,000 for year two. Revenue will then grow by 19% per year for years 3-6, remain the same in the seventh year, and then decline by 12% per year for years 8-10, when the product will be terminated.

b. Cost of goods sold will be 70% of sales.

c. Equipment will be purchased today for $1,950,000 and will be depreciated over the 7-year MACRS schedule. Installation of the equipment will cost $25,000. (Installation costs are depreciable.) The equipment has salvage value of $60,000 at the end of 10 years.

d. NWC of $100K will be needed to start the project and will be recouped in year 10.

Required -

1. Calculate operating cash flows using a 35 percent tax rate. If you have negative taxes, treat that as an immediate tax credit (positive CF).

2. Calculate the NPV assuming the firm finances with 70% equity at a cost of 12% and the rest with bonds yielding 6% for an overall cost capital of 9.57%.