Reference no: EM131613963
As head of the New Products Development committee for Campari, the company producing the famous Campari and Aperol bitters, you realize that the renewed interest in the Aperol Spritz cocktail will not last forever. You decide to branch into the Alcopop segment of the market, a kind of low-alcohol content beverages targeted to teenagers. The first thing you do is study the market to ascertain that the product would sell. Market tests suggest that you should be able to sell at least 2,800,000 bottles a year in Europe, as long as the price does not exceed 3 euros per bottle. Being a smart manager, you decide that the price per bottle should then be 2.8 euros. In order to convince the CEO and the board of directors that the new business enterprise is a good idea, you need to make a detailed business plan, which includes a comparison between the company’s investment criteria and the project you are suggesting. Producing the new beverage comes with a price: An initial investment of 5,000,000 euros, producing the molds that will manufacture the new bottles. You depreciate their cost linearly to 0 because they are custom-made for the product and you don’t think you’ll be able to sell them. It turns out, however, that you will be able to sell them for 600,000 euros, as you can recycle the material they are made of. Variable costs include making the bottle for each drink, costing about 0.9 euros in raw resources and 0.6 euros in electricity and packaging. Every year, you will spend 700,000 in marketing to the younger generations. All costs and profits, with the exceptions of the initial investment, start in year 1. You expect to be able to sell the product for 6 years. You need to set up working capital, starting from year 1. The first year you set aside 650,000 in working capital, and the level of working capital will increase by 5% every year, and the final level will then be freed up at the end of the project. Assume 25% corporate taxes. The company is fully equity financed. The risk free rate and the market risk premium are both 5% and the company is as risky as the market.
What is the operating cash flow in each of the years the project will be in place?
What is the net present value of the project? Should you go ahead with the project?
What is the payback period?
What is the internal rate of return? Would your answer change if the tax rate was raised to 40%? (No need for calculations, but please provide an explanation).