Company: BubblePop Project: APPKiller Youre the CFO of the tech company, BubblePop. Your CMO (Chief Marketing Officer) is proposing a new product called APPKiller that will be sold online for $10 per unit. The CMO expects sales of 100,000, 110,000, 120,000, 90,000 and 70,000 units over the products 5 year life. COGS is 20% of sales and operating expenses are estimated at $350,000 per year. The companys tax rate is 30%.

The initial investment in the project is as follows.

$1,000,000 for fixed equipment machinery

$200,000 in initial raw materials

The machinery is depreciated over 8 years straight-line ($125,000 per year).

At the end of 5 years, the product is expected to become obsolete. The machinery will be sold off for $600,000 at that time. Raw materials will be sold off netting the company the $200,000 back that they had originally invested.

FYI, the company has already spent $75k on an overpriced consultant last year analyzing this deal. (I heard he was a college professor in RI).

Oh, and about their WACC

The companys stock is trading for $20 per share. There are 50,000 shares outstanding. Company beta is 2.0. The market risk premium is 6% and the risk free rate of return is 3%.

Corporate debt matures in 2020 and is trading at 90% on 800 bonds with a par value of $1,000. The coupon rate is 10%. The bonds pay coupons semi-annually (2x per year).

The company has a small amount of Preferred stock. 2,000 shares trading at $90. Par value is $100 and annual income on the Preferred stock is 9.5%.

Using NPV, should the company invest in the APPKiller project?