Reference no: EM132964508

Crazy Snacks, Inc. is considering adding a new line of cookies and bars to its current product offer. The company already paid $250K for a marketing research that provided evidence about the convenience of this type of product at this time. The new line will require an additional investment of $50K in raw materials to produce the cookies. The project's life is 7 years and the firm estimates selling 500K packages at a price of $2 per unit the first year; but this volume is expected to grow at 15% the next two years, then at 10% for the following two years, and finally at 5% 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 amount 20% of sales and the fixed costs will be $850K. The equipment required to produce the cookies and bars will cost $1.1M, and will require an additional $50K to have it delivered and installed. This equipment has an expected useful life of 7 years and it will be depreciated using the MACRS 5-year class life. After seven years the equipment can be sold at a price of $100K. The cost of capital is 15% and the firm's marginal tax rate is 35%.

Problem a) Using Excel, calculate the initial investment, annual after-tax cash flows for each year, and the terminal cash flow.

Problem b) Using Excel, determine the payback period, discounted payback period, NPV, PI, IRR, and MIRR of the new line of candies. Should the firm accept or reject the project?

Problem c) Using Excel, the firm is considering three scenarios for the new line of cookies and bars. Under the best, base, and worst case scenario the firm will sell 1,200,000, 1,500,000, and 1,700,000 packages the first year with the same expected growth rates in units and price described in the problem. Re-examine the decision criteria in part (a) under each of these scenarios.