Expending their operations into a new line of pastries

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Reference no: EM13805991

The Leventhal banking company is thinking of expending their operations into a new line of pastries. The form expects to sell $350,000 of the new product in the first year and $500,000 each year thereafter. Direct costs including labor and materials will be 60% of sales. Indirect incremental costs are estimated at $400,000 a year. The project will require several new ovens which will cost a total of $500,000 and be depreciated straight line over five years. The current plan is underutilized, so space is available that cannot otherwise be sold or rented. The firm's marginal tax rate is 35% and cost of capital is 12%. Assume revenue is collected immediately and inventory is bought and paid for every day, so no additional working capital is required.

A. Prepare a statement showing the incremental cash flows for this project over an eight year period. (Structure as a new venture)

B. Calculate payback period, NPV, PI

C. If the space to be used could otherwise be rented for 30k a year how would you put that fact into the calculation? Would the project be acceptable in that case?

Reference no: EM13805991

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Expending their operations into a new line of pastries : The Leventhal banking company is thinking of expending their operations into a new line of pastries. The form expects to sell $350,000 of the new product in the first year and $500,000 each year thereafter. Prepare a statement showing the incremental..

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