Should fff go ahead with the new equipment

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Question - Frank's Food Frenzy (FFF) has asked you to make a recommendation for an investment proposal they have been looking at and trying to decide on. The investment is for new equipment to build a new snack with a total cost of $7,200,000 plus $100,000 shipping costs. FFF is also planning to throw a big celebration if the investment is successful for $10,000. This new equipment will require an increase in inventory of $50,000 from day one of the proposal. All other assets of the company are remaining the same. Sales of this new product will be $12,000,000 per year with COGS estimated at 75% of sales. All other expenses are staying the same as before. FFF WACC is 15% and their marginal tax rate is 38%. The new equipment will have a CCA rate of 20% and there will be other assets in this class when the project ends in four years. The salvage value of the equipment will be $350,000 in four years. Assume the risk profile of the proposal is the same risk profile of JGG.

Required - Based on the NPV method, should FFF go ahead with the new equipment?

Reference no: EM133174480

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