OM FINAL

FIN 351 FALL 2018 Quiz 7

Name:

Capital Bttdgeting QuL- tindependent)

Section Number

o7

3

Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The initial cost of the assets is $90 million, and the company’s working apjtj would increase by $12 million during the life of the new product. The new product is estimatedto have a useful life of four years, at which time the assets would be sold for $16 million. Management expects companysto increase by $130 million the first year, $170 million thednd year, $150 million the third year, and then trailing to $60 million by the fourth year because competitors have fully launched competitive products. Operating expenses are expected to be 70% of sales, and depreciation is based on anjass life of three years under MACRS (modified accelerated cost recovery system). Year 1: 33.33%, Yearr44.45%, Year 3; 14.81% and Year 4: 7.41%. If the required rate of return on the Vitamin-Burger project is 8% and the companys tax rate is 30%, should the company invest in this new product?

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