You are a profitable conglomerate thinking about getting into the gelati business. This is a $1 billion market (in annual sales) of which you believe you can capture market share of 10% right away and maintain it for 10 years. You currently sell some dessert items though that you believe will get cannibalized. Current sales in these businesses last year were $10 million over all items, but now will get reduced 20%. You have just been told that they are declining businesses and would have decreased 10% even if you don't make this gelati investment. On the other hand, you believe there will be synergies that will increase sales in the first year and indefinitely equal to an amount of 5.5% over current sales (see table). Costs of goods sold are always 40% of sales for all businesses. Operating costs not counting depreciation or overhead is $5 million each year of your ten-year horizon. A This new venture will be overseen by a team from headquarters that currently costs you $2 million in annual salary and other direct costs such as benefits but will now need to be expanded to an overall cost of $5 million each year. Headquarters also has the practice of allocating an extra charge of a 10% premium on top of the direct costs in order to capture the firm overhead costs via allocation. Net Working Capital is always 10% of sales. The investment required will be $100 million, of which 80% is land and the other 20% PPE. This new PPE will be straight line depreciated over the ten years. This is in addition to equipment previously bought about five years ago at $200 million and straight-line depreciated over five years. If you decide against this project, you will sell this old equipment now -- with the last year's depreciation remaining -- for 10% of what you paid. Of course, if you proceed with the project, the equipment will be used and depreciated for the last time right away. Act Your figures are as defined above for the next ten years. Go Then the business will be closed and sold for just the land value which is expected to be worth Your figures are as defined above for the next ten years. Then the business will be closed and sold for just the land value which is expected to be worth $80 million. The corporate tax rate is 40% and you will straight-line depreciate over the 10 years. Assume that all cash flows are year-end except for the up-front investment. You also have the following financial data pertaining to the market and to your publicly-traded competitors: Security Rate 3-month T-bill 3% 10-Year T-bond 6% 30-year T-bond 7% Market Risk Premium over Treasury Bonds is 6% Your Firm FrozFood Ice Queen Acti Go to Stock Price $6 58 $12.50 3-month T-bill 3% 10-Year T-bond 6% 30-year T-bond 7% Market Risk Premium over Treasury Bonds is 6% Your Firm FrozFood Ice Queen Stock Price $6 $8 $12.50 Total Book Capitalization$110 Million $120 Million $125 Million Leverage Ratio (Book) 0% 15% 20% 20 Million 10 Million 8 Million Shares Outstanding Beta (Value-Line) 1.0 0.9 1.0 Total Sales $200 Million $210 Million $200 Million Gelati Sales $0 Million $200 Million $160 Million