Question
I don't have any idea about this case, PLEASE help me!! Rick envisions that this frozen pizza manufacturing business will have an 18 year life-span.
I don't have any idea about this case, PLEASE help me!!
Rick envisions that this frozen pizza manufacturing business will have an 18 year life-span. Rick hired a consulting firm to scope out various buildings he could buy as a potential investment, and the consulting service fee was $20,000. The building they found will cost Rick $3.5 MM if he decides to go ahead with the project. To begin manufacturing, Rick will also need to spend $2.75 MM on equipment. The building has a CCA Rate of 10%, while the equipment has a CCA Rate of 20%.
Capitalizing on the success of his imaginary pizza shop, Rick will sell two types of frozen pizza the Gut Buster which will have an initial wholesale price of $6.95, and the Skinny Whinney which will have an initial wholesale price of $5.45. Variable costs for the Gut Buster are $3.72, and for the Skinny Whinney of $3.08. Initial annual fixed costs are forecast to be approximately $450,000. The wholesale price, variable costs and fixed costs are all expected to increase annually at the anticipated rate of inflation of 2.5%. Initial working capital needs are forecast to be $42,000, and thereafter be 14% of Sales.
First year sales are expected to be 90,000 units of Gut Buster and 85,000 units of Skinny Whinney. Unit sales are expected to grow 15% for years 1 7, and then beginning in year 8 are expected to grow 3% per year.
At the end of 18 years, Rick is hoping that he will be able to sell the manufacturing business on an as-is basis for $26.22 MM. Tax effects at the end of the 18-year life of the plant can be ignored for the purpose of this analysis. The tax rate is anticipated to be 28%, and the discount rate is 12.5%.
Please analysis of whether or not Rick should go into the frozen pizza manufacturing business.
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