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Candy maker DM Sweets recently hired you as an assistant to the CFO. Your first task is evaluating whether DM should expand by developing a
Candy maker DM Sweets recently hired you as an assistant to the CFO. Your first task is evaluating whether DM should expand by developing a new pastry line. Your research reflects the following information: Given how consumer preferences evolve over time, you expect the proposed project to span the next five years. Current estimates indicate sales will be 2 million units in year one with 25% sales growth over the following 2 years and 5% growth in the final 2 years. The unit price in Year 1 is $2. Given estimated demand, prices are expected to rise by 3% each subsequent year. The project requires purchasing new equipment worth $2.5 million, after installation. The new equipment is state-of-the-art, so you expect to be able to sell it for $350,000 when the project ends. As a result of the project, current assets would increase by $450,000, and payables would increase by $150,000. The new equipment falls into the MACRS 7-year class, so the applicable rates are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46% in each successive year. Variable costs are estimated to be 65% of sales revenue, fixed costs excluding depreciation are estimated at $750,000 per year, the state-plus-federal tax rate is 25%, and the corporation's cost of capital is 8%. In addition to the previous risk analysis, are there any externalities that DM Sweets should consider? *No calculations are necessary. Consider only conceptual issues* Candy maker DM Sweets recently hired you as an assistant to the CFO. Your first task is evaluating whether DM should expand by developing a new pastry line. Your research reflects the following information: Given how consumer preferences evolve over time, you expect the proposed project to span the next five years. Current estimates indicate sales will be 2 million units in year one with 25% sales growth over the following 2 years and 5% growth in the final 2 years. The unit price in Year 1 is $2. Given estimated demand, prices are expected to rise by 3% each subsequent year. The project requires purchasing new equipment worth $2.5 million, after installation. The new equipment is state-of-the-art, so you expect to be able to sell it for $350,000 when the project ends. As a result of the project, current assets would increase by $450,000, and payables would increase by $150,000. The new equipment falls into the MACRS 7-year class, so the applicable rates are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46% in each successive year. Variable costs are estimated to be 65% of sales revenue, fixed costs excluding depreciation are estimated at $750,000 per year, the state-plus-federal tax rate is 25%, and the corporation's cost of capital is 8%. In addition to the previous risk analysis, are there any externalities that DM Sweets should consider? *No calculations are necessary. Consider only conceptual issues*
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