Question 1 (24 points) Randys an ice cream manufacturer is planning to invest in a new product called strawberry mint ice cream , which will include real strawberries To manufacture the product, Randys will have to buy a strawberries processor machine In addition, since the old ice cream machine of the company broke down it has to replace it with a new one Below is the purchasing information of the two machines A strawberries processor machine The machine costs $500,000 and is depreciated in a straight line over 4 years This machine has a salvage value of $30,000 A new ice cream machine The machine costs $850,000 and is depreciated in a straight line over 5 years This machine has a scrap (salvage) value of $200,000 Other information The strawberry mint ice cream project's estimated lifecycle is 5 years Randys estimates that in the first year the Product will have revenues of $1 million, and then revenues are expected to increase by 12 annually Production costs are expected to be 60 of the revenues Marketing costs are expected to be 30 of the revenues in the first year and then after 10 of the revenues in the following years At the end of year 5 Randys estimates that it will be able to sell the strawberries process machine for $120,000 The ice cream machine will worth 0 and therefore will not be sold During the last 5 years, Randys has spent $20,000 in the development the of the strawberry mint ice cream To support the project, the Randys will need to invest in working capital The company will need to invest at the beginning of each year in inventory 10 of the expected revenues in the following year, in accounts receivables 25 of the current years revenues Accounts payable will amount to 15 of the cost of goods sold at the beginning of each year All the working capital will be recovered at the end of the project in 5 years Randys corporate tax is 25 and Capital gain tax is 20 Randys cost of capital is 13 Should Randys undertake the project Page 4 of 13 Page 5 of 13

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Question 1 (24 points) Randys an ice-cream manufacturer is planning to invest in a new product called strawberry mint ice-cream , which will include real

Question 1 (24 points)

"Randys" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint ice-cream ", which will include real strawberries. To manufacture the product, Randys will have to buy a strawberries processor machine. In addition, since the old ice-cream machine of the company broke down it has to replace it with a new one. Below is the purchasing information of the two machines:

- A strawberries processor machine: The machine costs $500,000 and is depreciated in a straight line over 4 years. This machine has a salvage value of $30,000.
- A new ice-cream machine: The machine costs $850,000 and is depreciated in a straight line over 5 years. This machine has a scrap (salvage) value of $200,000.

Other information:

The strawberry mint ice-cream project's estimated lifecycle is 5 years.
Randys estimates that in the first year the Product will have revenues of $1 million,

and then revenues are expected to increase by 12% annually.
Production costs are expected to be 60% of the revenues.
Marketing costs are expected to be 30% of the revenues in the first year and then

after 10% of the revenues in the following years.
At the end of year 5 Randys estimates that it will be able to sell the strawberries

process machine for $120,000. The ice-cream machine will worth 0 and therefore

will not be sold.
During the last 5 years, Randys has spent $20,000 in the development the of the

strawberry mint ice cream.
To support the project, the Randys will need to invest in working capital. The

company will need to invest at the beginning of each year in inventory 10% of the expected revenues in the following year, in accounts receivables 25% of the current years revenues. Accounts payable will amount to 15% of the cost of goods sold at the beginning of each year. All the working capital will be recovered at the end of the project in 5 years.
Randys corporate tax is 25% and Capital gain tax is 20%.
Randys cost of capital is 13%.

Should Randys undertake the project?