Case Study 3 Constructed Response Answer Hocus Pocus Company wants to increase sales by adding a new product line. The company is considering three different projects. However, its capital budget is limited to $1,500,000. In addition, the company requires a rate of return of 10%. The information concerning the three product lines is given below. Net Initial Investment Broomsticks $1,170,000 Magic Wands $983,000 Crystal Balls $2,210,000 Budgeted Income Statement for the next five years: Sales $500,000 $450,000 $650,000 Cost of Goods Sold 80.000 50,000 32.000 Gross Margin 420,000 400,000 618,000 Marketing and Administrative Expenses 100,000 130,000 22.000 Net Income 7 7 7 *Assume all amounts stated on the budgeted income statement are cash items. Required a) Determine the net present value for each project assuming all cash flows cease after five years Case Study 3 Constructed Response Answer a) b) Which project should Hocus Pocus invest in and why? Case Study 3 Constructed Response Answer b)