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Blue Jeans Corp. has done an analysis of whether to continue offering a new line of jeans or to halt operations, this analysis cost $250,000.
Blue Jeans Corp. has done an analysis of whether to continue offering a new line of jeans or to halt operations, this analysis cost $250,000. The new product has expected sales at the end of this year of $800,000 and this grow every year by 3%. This product has created some cannibalization worth $75,000 of sales reduction each year. COGS is $200,000 at the end of this year and will also grow every year by 3%. COGS related to the cannibalized product is $25,000 each year. The line of jeans will be in production for three years, afterwards they become obsolete. The equipment cost of $2M ($2 million) was spent at the beginning of this year (t=0) and it has a 40% CCA rate. The space for the equipment could have received $10,000 each year in its next best alternative use. Interest charges are $50,000 annually. There will be a one-time net working capital increase of $20,000 at the end of year one; this will be recovered at the end of year 3. The firm demands a 5% return on projects such as this. The corporate tax rate is 30%. Assume that at the end of year 3 the equipment is sold for $0 and does not bring any tax consequences thereafter. What is the NPV of this project? A $584,434 B -$550,910 $354,306 D$547,368 E $531,847
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