Color Cupcakes wants to expand its business by selling cookies. The following information is used for project evaluation.
- The new cookies will generate $1,500,000 in sales each year for the next 10 years. A portion of these new sales, $500,000, will come from existing customers who switch from cupcakes to cookies.
- Because of the expansion, operating expenses will increase by $600,000 per year.
- The firm spent $200,000 on market research and testing the new recipe.
- The firm uses straight-line depreciation. The project has an economic life of 10 years.
- Total cost of the plant, property and equipment that will be required for the project is $1,200,000. The book value will depreciate to 30,000 at project completion. The salvage value is estimated to be $100,000.
- The firm will increase net operating working capital by $50,000 at the beginning of the project, and it will be liquidated at the end of the project.
- The firm’s marginal tax rate is 20%.
- The firm’s bonds have a yield of 8%, its cost of equity is 10%, and its capital structure has 45% debt and 55% equity.
- questions (it needs calculation process and just accept HP 10bll+ as tool, no excel )
- What is (are) the irrelevant cash flow(s) in the capital budgeting decision?
- How much is the yearly depreciation expense? Follow the cash flow based approach as discussed in chapter 12. Show calculation steps and/or calculator inputs and highlight your final answer (ignore the dollar sign $).
- How much is the initial net cash flow of the project (i.e., CF0)? List the relevant cash flows, show calculation steps and/or calculator inputs, and highlight your final answer (ignore the dollar sign $).
- How much is the project’s net operating cash flow in year 7? Show calculation steps and/or calculator inputs and highlight your final answer (ignore the dollar sign $).
- How much is the project’s total cash flow in year 10? Show calculation steps and/or calculator inputs and highlight your final answer (ignore the dollar sign $).
- How much is the firm’s WACC? Show calculation steps and/or calculator inputs and highlight your final answer (express in percentage such as 12.34%).
- What is the NPV of this project and what is your investment decision? Show calculation steps and/or calculator inputs and highlight your final answer (keep a whole number).
