Reference no: EM132417230

Problem: Delicious Snacks, Inc. is considering adding a new line of candies to its current product line. The company already paid $300,000 for a marketing research study that provided evidence about the demand for this product at this time. The new line will require an additional investment of $70,000 in raw materials to produce the candies. The project's life is 7 years and the firm estimates sales of 1,500,000 packages at a price of $1 per unit the first year; but this volume is expected to grow at 17% for the next two years, 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 be 70% of sales and the fixed costs will be $500,000.

The equipment required to produce the candies will cost $900,000, and will require an additional $30,000 to have it delivered and installed. This equipment has an expected useful life of 7 years and will be depreciated using the MACRS 5-year class life. After 7 years, the equipment can be sold at a price of $200,000. The cost of capital is 9% and the firm's marginal tax rate is 35%.

Required:

Question 1: Calculate the initial investment, annual after-tax cash flows for each year, and the terminal cash flow.

Question 2: Determine the NPV, IRR, and MIRR of the new line of candies. Should the firm accept or reject the project?