Reference no: EM132004325
Suppose Cold Stone is planning to sell 50,000 mini ice cream cakes per year ($4 per each), starting from next year. It costs $2.5 to make one mini cake.
Mini ice cream cakes are expected to generate profits for 3 years. Required rate of return on this project is 20%. Fixed costs for the project, including such things rents on the production facility, will run $12,000 per year. Further, Cold Stone needs to invests a total of $90,000 in manufacturing equipment today.
Assume that this $90,000 will be 100% depreciated over the 3-year life of the project. Furthermore, the cost of removing the equipment will roughly equal its actual value in 3 years, so it will be essentially worthless on a market value basis as well.
Finally, the project will require an initial $20,000 investment in net working capital, and the tax rate is 34%.
Question: should Cold Stone pursue this project?
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Should cold stone pursue this project
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