Teapton Inc. is planning to expand its core business of ice tea and green tea by introducing a new product called the Milk Tea in a Can. The company seeks your advice on whether this project should be taken up. The details are given below:

The initial investment in plant and machinery is 4.5 million.

The project also requires an initial net working capital of 1.2 million which will be recovered entirely when the project is sold off at the end of year 3.

The revenues from the new milk tea product are expected to be 8, 11 and 12 million in the first three years. The revenues from its ice tea and green tea are expected to be lower by $1.1 and 0.5 million in each of the next three years on account of the introduction of Milk Tea in a Can.

Variable cost is expected to be 60% of sales. Fixed costs are expected to be 0.9 million each year from year 1 to year 3.

Teapton uses tax depreciation, and assumes that all assets have a life of 5 years.

The company expects to sell off the assets after 3 years for $3 million.

Corporate tax rate is 35%. Capital gains tax rate is 20%. Discount rate is 10%

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