Thank you in advance!

Hocus Pocus Company wants to increase sales by adding a new product line. The company is considering three different projects. However, its capital budget is limited to $1,500,000. In addition, the company requires a rate of return of 10%. The information concerning the three product lines is given below.

Notes: Assume all amounts stated on the budgeted income statement are cash items. The total capital budget is limited to $1,500,000.

Broomsticks Magic Wands Crystal Balls Net initial investment $ 1,175,000 $ 1,000,000 $ 2,200,000 (Budgeted Income Statement for the next 5 years)

Sales $ 500,000 $ 450,000 $ 650,000

Cost of Goods Sold $ 80,000 $ 50,000 $ 32,000

Gross Margin $ 420,000 $ 400,000 $ 618,000 Marketing and Administrative Expenses $ 100,000 $ 130,000 $ 22,000

Net income ? ? ?

For additional resources on NPV: Check out Figure 10.14 on textbook pg 269 for a clear example of how to do NPV. This one is: =(870*1.7355)-1250 =259.89 =NPV Which is: =(annual cash flow amount*annuity present value factor)-initial investment amount

I also recommend the CH 10 Review Exercise 10-1 which includes: NPV of lease option at -63883.20 or =-16000*3.9927 NPV of buy option at -74526 or =-(12000*.7938)-65000

Part a) Determine the net present value for each project assuming all cash flows cease after five years.

Part b) Which project should Hocus Pocus invest in and why?

Part c) If Hocus Pocus had a capital budget limit of $2,300,000, how should they invest it?