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Wonderful Snacks Inc. is considering adding a new line of cookies and bars to its current product offer. The company already paid $250K for a
Wonderful Snacks Inc. is considering adding a new line of cookies and bars to its current product offer. The company already paid $250K for a marketing research that provided evidence about the convenience of this type of product at this time. The new line will require an additional investment of $50k in raw materials to produce the cookies. The project's life is 7 years and the firm estimates selling $500K oackages at 10% for the following two years, and finally at 5% for the last two years of the project. The per price per unit is expected to grow at the historical average rate of inflation of 3%. The variable costs will amount 20% of sales and the fixed costs will be $850. The equipment required to produce the cookies and bars will cost$1.1M, and will require an additional $50K to have it delivered and installed. This equipment has and expected useful life of 7 years and it will be depreciated using the MACRS 5 -year class life. After seven years the equipment can be sold at a price of $100K. The cost of capital is 15% and the firm's marginal tax rate is 35%.
a) Calculate the initial investment, annual operating cash flows, and the terminal cash flow.
b) Dertermine the payback period, discounted payback period, NPV, PI, IRR, and MIRR of the new line of cookies and bars. Should the firm accept or reject the project?
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