. Value of a Business. Jawbreaker, Ltd., a Hong Kong firm, makes and sells candy in large...
Question:
. Value of a Business. Jawbreaker, Ltd., a Hong Kong firm, makes and sells candy in large lots for other firms that package and sell the candy under various brand names. The firm could acquire a small candy exporting firm that has sold about 800,000 kilograms of candy annually to Korea and Japan. To operate the firm, Jawbreaker would have to hire a specialized salesperson for HK\$1,200,000 annually, including travel and entertainment expenses. Additional packaging machinery costing HK \(\$ 1,600,000\) must be acquired. The machinery would last five years, have no salvage value, and be depreciated on a straight-line basis.
Other data are as follows:
(a) Variable costs are HK \(\$ 0.80\) per kilogram.
(b) Selling price on the export business is HK\$4 per kilogram.
(c) Annual cash costs of operating the new machinery are HK \(\$ 320,000\).
(d) Tax rate is 40 percent. (Assume that Hong Kong and U. S. tax rules are the same.)
(e) Cost of capital is 16 percent.
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On the basis of this information and a 5-year time horizon, what is the most Jawbreaker should pay for this investment opportunity?
Step by Step Answer:
Managerial Accounting
ISBN: 9780538842822
9th Edition
Authors: Harold M. Sollenberger, Arnold Schneider, Lane K. Anderson