Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line
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Question:
Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years:
- The project can be operated at the company's Charleston plant, which is currently vacant.
- The project will require that the company spend $4.1 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on a straight-line basis over 5 years. Thus, the firm's annual depreciation expense is $4,100,000/5 = $820,000. The company plans to use the equipment for all 3 years of the project. At t = 3 (which is the project's last year of operation), the equipment is expected to be sold for $1,500,000 before taxes.
- The project will require an increase in net operating working capital of $730,000 at t = 0. The cost of the working capital will be fully recovered at t = 3 (which is the project's last year of operation).
- Expected high-protein energy smoothie sales are as follows:
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