Considering introducing new line of dried flowers

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Healthy Food Inc. is considering introducing a new line of dried flowers. The firm expects to be able to generate $ 4 million in revenue from this new line, each year for the next 10 years, and have a pre-tax operating margin of 50% on these revenue. Customers who come to buy the flowers are expected to buy the firm's traditional offerings (fresh fruit and baked goods) and it is anticipated that the annual revenue on these goods will increase as a result of these extra purchases from $14 million to $17 million, each year for the next 10 years. The firm has a 60% pre-tax operating margin in its traditional products. While Healthy Foods does not anticipate hiring to extra employees and the additional cost is expected to be $1 million. Assuming a 10-year life, a 10% cost of capital per annum, 40% tax rate per annum, what is the maximum (approximate value) that you would be willing to invest in this new product line? (You can assume that the initial investment will be depreciated straight line over 10 years to a salvage value of zero and depreciation is used for tax purposes.)

Reference no: EM131361354

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