Inna Jos$$ works as a financial analyst for Good Morning Cereals Inc. $($GMC$),$ a cereal manufacturer. Inna reports directly to GMC$$s CFO, Lance Wien. The board of directors is considering an investment in a new product line and has tasked Lance with gathering all relevant information to make this decision. Lance has asked Inna to assist him with this work.

The following documents are attached:

$$ Appendix I: Notes from meeting with Lance

$$ Appendix II: Quote for new production equipment

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Notes from meeting with Lance

$1.$ GMC is going to put the new production equipment in the excess space in the warehouse. The new product is called Daily Grains Cereals $($DGC$).$

$2.$ Currently, the excess space in the warehouse is being rented and rental income of $$2,500$ per month before tax is received. There will be nine months remaining on the lease when the production equipment is installed. There are no penalties for termination.

$3.$ The investment in inventories will increase from $$65,000$ to $$82,000.$

$4.$ Annual revenues and costs expected to be generated from sales of DGC for each of the next eight years are revenues of $$650,000$ and related cost of goods sold of $$160,000.$

$5.$ Annual fixed costs will increase from $$840,000$ to $$925,000$ with the new product line.

$6.$ Costs incurred in the past four months for development of the new product, DGC$,$ and related costs of focus groups and product testing totalled $$80,000.$

$7.$ Expect revenues from a related product line, Healthy Oats Cereal $($HOC$),$ to be reduced by $$75,000$ each year once the new product, DGC$,$ is introduced. HOC has related variable costs of $24\%$ of revenues.

$8.$ The company$$s income tax rate is $28\%$ and its weighted average cost of capital is $11\%.$

Remarks

$$ Equipment should last eight years.

$$ At end of useful life, estimated salvage value is $20\%$ of original price $($excluding

delivery and installation$).$

Quote is valid for $90$ days.