OM FINAL

FIN 351 FALL 201$ Midterm 1

Name:

Capital Budgeting Midterm

Section Number

‘ 05

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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 $85 million, and the company’s working capital would increase by $15 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 $i.5!M1flon. Management expects company sales to increase by $120 million the first year, $160 million the second year, $130 million the third year, and then trailing to $70 million by the fourth year because competitors have fully launched competitive products. Operating expenses are expected to be 70% of sales, and depreciation is bae4pnanst)life of three years under MACRS (modified accelerated cost recover 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 10% and the company’s tax rate is 35%, should the company invest in this new product? -

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