OM FINAL

FIN 351 Capital Budgeting Quiz 2

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Name: _____________________________________

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 million the first year, $175 million the second year, $155 million the third year, and then trailing to $65 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 an asset life of three years under MACRS (modified accelerated cost recovery system). Year 1: 33.33%, Year 2: 44.45%, Year 3: 14.81% and Year 4: 7.41%. If the required rate of return on the Vitamin-Burger project is 8% and the company's tax rate is 30%, should the company invest in this new product?

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