Answered step by step
Verified Expert Solution
Question
1 Approved Answer
You are thinking of starting Peaco, which will produce Peakbabies, a product that competes with Ty's Beanie Babies. In year 0 (right now), you will
You are thinking of starting Peaco, which will produce Peakbabies, a product that competes with Ty's Beanie Babies. In year 0 (right now), you will incur costs of $4 million to build a plant. In year 1, you expect to sell 80,000 Peakbabies for a unit price of $25. The price of 25 will remain unchanged through years 1 to 5. Unit sales are expected to grow by the same percentage (g) each year. During years 1 to 5, Peaco incurs two types of costs: variable costs and SG&A (selling, general, and administrative) costs. Each year, variable costs equal half of revenue. During year 1, SG&A costs equal 40% of revenue. This percentage is assumed to drop 2% per year, so during year 2, SG&A costs will equal 38% of revenue, and so on. Peaco's goal is to have profits for years 0 to 5 sum to 0 (ignoring the time value of money). This will ensure that the $4 million investment in year 0 is paid back by the end of year 5. What annual percentage growth rate g does Peaco require to pay back the plant cost by the end of year 5
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started