Question
Garcia Corp. is currently evaluating a new carbonated grape juice product called Grapeful Soda. Grapeful is superior to competing grape products like Grape Nehi. Production
Garcia Corp. is currently evaluating a new carbonated grape juice product called Grapeful Soda. Grapeful is superior to competing grape products like Grape Nehi. Production facilities for the Grapeful product would be set up in an unused section of Garcias main plant. Machinery with an estimated cost of $300,000 will be purchased to manufacture the soda. Garcias inventories would have to be increased by $10,000 at the time of the initial investment and they are going to be totally recouped at the end of year 4. The machinery has a capital cost allowance (CCA) depreciation rate of 25%. The machinery is expected to have a salvage value of $110,742 after 4 years of use. Garcias management expects to sell 200,000 bottles of the new product in each of the next 4 years at a price of $2.00 per bottle, but $1.50 per bottle would be needed to cover fixed and variable operating costs. Garcias tax rate is 40%. Assume that you are Garcias corporation financial analyst and you need to: Calculate the NPV assuming a cost of capital of 10%
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