OM FINAL

fIN 351

Name:

FALL2O1$ Quiz6

Cczpital Budgeting Quiz 1

Section Number

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Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The initial cost of

the assets is $95 million, and the company’s working capital would increase by $13 million during the life

of the new product. The new product is estimated to have a useful life of four years, at which time the assets

would be sold for $16 million. Management expects company sales to increase by $140 milliq the first

year, $ 75 million the second year, jjillipp the third year, and then trailing to $65 million by the fourth

year because competitors have fully launched competitive products. Operating expenses at-c expected to be

70% of sales, and depreciation is based on an as ife of three years under MACRS (modified accelerated

cost recovery system). Year 1: 33.33%, Year 2: 44.45%, Year 3: 14.8 10/n and Year 4: 7.41%. If the required

rate of return on the Vitamin-Burger project is 8% and the company’s tax rate is 30%, should the company

invest in this new product?

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