Question
Capital Budgeting Problem - Finance Are there any flavors that Hershey hasn't tried to turn into Kisses? Well, as a matter of fact, there is
Capital Budgeting Problem - Finance
Are there any flavors that Hershey hasn't tried to turn into Kisses? Well, as a matter of
fact, there is a new proposal for Pumpkin Pie Kisses! These will be a seasonal flavor due out next Thanksgiving. The expansion of the flavorful Kiss line will require the replacement of the Kiss-stuffing machine with a new one that can change flavors more easily. The machine may be purchased for $250,000 and will require an installation cost of $30,000. The old machine was purchased four years ago for $80,000 and can be sold today for $50,000. Both machines fall into the 5-year MACRS classification, however, the life of the project is only four years.
Revenues on the Pumpkin Pie Kisses are expected to be $100,000 in the first year, but
decline by 20% per year as the novelty wears off. Expenses are projected to increase by
$5,000 for the first year, and decline by the same 20% as revenue. Because of increased
production, inventory will increase by $15,000, accounts receivable will increase by $10,000, and accounts payable will increase by $3,000.
After four years, the new machine can be sold for $100,000. If Hershey kept the old
machine, it would have a resale value of only $5,000 four years from now. Hershey's tax rate is 20% and its cost of capital is 12%. What should Hershey do?
**This is the FULL question**
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started