Question
Simmonds Products has spent $158,000 (sunk cost) on research to develop lowfat imitation wine. The firm is planning to spend $210,000 on a machine to
Simmonds Products has spent $158,000 (sunk cost) on research to develop lowfat imitation wine. The firm is planning to spend $210,000 on a machine to produce the new wine. Shipping cost of $60,000 and installation costs of $40,000 for the machine will be capitalized and depreciated via straight-line over 7 years. Inventory levels will increase by $30,000, account receivables will increase by $20,000, while account payables will increase by $15,000. The required rate of return is 14 percent, the tax rate is 35 percent and ROE is 18 percent. Earnings Before Interest and Taxes, EBIT, is expected to be $350,000 per year for years 1 through 7. Find the initial investment for the imitation lowfat wine project.
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