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Question 1 (25 points) Foodies Inc. is an American multinational snack food manufacturer. For the past few years, the firm had spent $450 million on the development of a new vegan chocolate candy - V\&V's, which according to the firm will be a revolution in its ingredients and taste for the near future. The firm's analysts estimate that within 5 years the competition will be too high and therefore the firm will stop manufacturing and selling the V\&V's candy. To manufacture the candies, the firm will need to invest $300 million in a new grinding machine today, which will be depreciated over 3 years with no salvage value. 3 years is also the machine's lifecycle. After 3 years, to continue the production, the firm will be required to invest $180 million in a new grinding machine, which will be depreciated over 3 years with a salvage value of $30 million. 3 years is also the machine's lifecycle. This machine will be sold when the project terminates (in 5 years) for its book value at that time. Foodies Inc. expects revenues of $200 million in the first operating year. These revenues are expected to grow by 20% each year for 2 years and then remain constant until the end of the project. The operating costs are expected to be 30% of the revenues. The new vegan candy marketing expenses are expected to be $10 million per year. In addition, the firm expects that due to the production of the "V\&V's candy, the operating profit from its other snacks operations will decrease by $20 million in the first 3 years of production and then after by $15 million in each of the following years. To finance the project, the firm will take a five-year loan (for the required amount). The cost of borrowing for the firm (for any amount) is 3% APR. Interest payments will be made at the end of each year and the principal will be paid in full at maturity of the loan. The firm estimates that the project will require working capital at the beginning of each production year which will be recovered at the end of the project. The estimated working capital is 20% of the revenues. - The corporate and capital gain tax rates are 25%. - The cost of capital of the firm is 15%. - The firm has other profitable projects. - Unless stated otherwise, all cash flows occur at the end of each year. The CEO asks you to present your opinion. Please present your recommendation and justification? Answer: "Foodies Inc" should / should not (circle one) undertake the V\&V's project