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Budweiser is thinking about making wine Expected sales per unit 290,000 bottles sold in the first year Sales revenue declines 10% per year (ie, sales
Budweiser is thinking about making wine
- Expected sales per unit
- 290,000 bottles sold in the first year
- Sales revenue declines 10% per year (ie, sales growth = -10%)
- Proposed selling price per bottle = $5.10
- Variable cost per bottle = $2
- Fixed costs = $270K/year in maintenance and labor
- Budweiser also expects to lose $300K pretax per year (revenue net of expenses) from beer sales as people switch from beer to wine
- Working capital necessary = $50K
- Wine-making equipment
- would cost $750K, plus $50K in modifications required on the assembly line (included in depreciable basis)
- depreciated 5-year MACRS
- After five years, project ends as everyone realizes Budweiser wine is disgusting
- all remaining working capital recouped
- wine-making equipment sold for $400,000
- Tax rate = 30%
- Assume any negative taxes can be treated as an immediate tax credit. (=treat negative taxes as a positive CF.)
- Required return = 10%.
Calculate the NPV and the IRR of the project. Should the company pursue this project?
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