Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The initial cost of the assets is $120 million, and the companys working capital would increase by $10 million during the life of the new product. The new product is estimated to have a useful life of four years, at which time the assets would be sold for $15 million.

Management expects company sales to increase by $120 million the first year, $160 million the second year, $140 million the third year, and then trailing to $50 million by the fourth year because competitors have fully launched competitive products. Operating expenses are expected to be 60% of sales, and depreciation is based on an asset life of three years under MACRS (modified accelerated cost recovery system).

If the required rate of return on the Vitamin-Burger project is 10% and the company's tax rate is 35%, should the company invest in this new product? Why or why not?

(Please write out the calculations)

0 C 1 D 2 E 3 4 A Year Investment Outlays: Fixed capital Net working capital Total Annual after-tax operating cash flows: Sales Cash operating expenses Depreciation Operating income before taxes Taxes on operating income Operating income after taxes Add back: depreciation After-tax operating cash flow Terminal year after-tax nonoperating cash flows: Salvage value After-tax salvage value Return of net working capital Total Total after-tax cash flow NPV