Quiz

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Frito Lay is considering a new line of potato chips. This will be a two year project.

a. Frito Lay paid $1,000,000 last year to a winning person who thought of the new line of potato chips.

b. New equipment for the factory line will cost $12,000,000 and depreciation is by the 5-year MACRS method. Purchase of the equipment will require an increase in net working capital of $600,000 at time 0 (which will be recaptured at the end of the project).

c. The new potato chips will generate an additional $6,000,000 in revenues in the first year and $4,000,000 in revenues in the second year.

d. In addition to the additional revenues outlined in c. The new potato chips will decrease existing chip line revenues by $2,000,000 the first year. There will not be any effect in the second year.

e. The new project is estimated to have expenses of $150,000 each year.

f. At the conclusion of the project, the equipment can be sold for $7,000,000.

g. The firms marginal tax rate is 20 percent, and the projects cost of capital is 7 percent.

The following is the MACRS Depreciation Table:

Year	3-year	5-year	7-year
1	33.33%	20.00%	14.29%
2	44.44%	32.00%	24.49%
3	14.82%	19.20%	17.49%
4	7.41%	11.52%	12.49%
5		11.52%	8.93%
6		5.76%	8.93%
7			8.93%
8			4.45%

What is the after tax OCF in year 2?

What is the project's NPV?

What is the project's IRR?

Should you ACCEPT or REJECT the project?