Model 1 Delicious Snacks, Inc.

Model 1
Delicious Snacks, Inc. is considering adding a new line of candies to its current product line.
The company already paid $300K for a marketing research that provided evidence about the
convenience of this product at this time. The new line will require an additional investment of
$70K in raw materials to produce the candies. The project’s life is 7 years and the firm estimates
selling 1.5M packages at a price of $1 per unit the first year; but this volume is expected to grow
at 17% the next two years, then at 12% for the following two years, and finally at 7% for the last
two years of the project. The price per unit is expected to grow at the historical average rate of
inflation of 3%. The variable costs will amount 70% of sales and the fixed costs will be $500K.
The equipment required to produce the candies will cost $750K, and will require an additional
$30K to have it delivered and installed. This equipment has an expected useful life of 7 years
and it will be depreciated using the MACRS 5-year class life. After seven years the equipment
can be sold at a price of $200K. The firm plans financing the new equipment with 30K
semiannual coupon bonds that mature in 30 years, with $1,000 face value, 5% coupon rate, and
12% yield to maturity. The cost of capital is 12% and the firm’s marginal tax rate is 40%.
Determine the payback period, discounted payback period, NPV, PI, IRR, and MIRR of the new
line of candies. Should the firm accept or reject the project?