You work for SUPERMAR, a supermarket holding company, and have noticed an increased interest in organic products. Therefore, you have decided to assess the financial feasibility of a temporary introduction (project will last only for 3 years) of a new line of organic products using the SUPERMAR brand. You have decided to apply NPV, IRR, Payback Period and Profitability Index as your criteria. Your Companys current policy is to give priority to projects with a Payback Period of 3 years or less. This is what you know:

a. The initial investment will be financed through debt, with a cost of debt of 9% per year. The annual interest expense would be estimated by multiplying the initial investment times the 9%.

b. Prior to the preparation of this proposal, the Market Research Department invested $3 million using focus groups to determine the demand for organic products with generic brands. The results of the study have also been used for other products already available in SUPERMAR stores. Therefore, the Market Research Department Manager has suggested to you that only 2/3 of the $3 million would be the new lines allocation of the cost.

c. Revenue is expected to be $15 million in year one. Growth rates in revenue for years 2 and 3 are expected to be 8% and 10%, respectively.

d. The Sales division estimates that the new product will erode the revenue of other SUPERMAR products by $700,000 per year during the life of the new project. The other lines of products bearing this loss in revenues have a similar profit margin as that of the new line. Given the dominance of SUPERMARs market share, it can be assumed that no other competitor is in a position to launch the same range of products and cause a similar level of revenue erosion.

e. COGS (not including depreciation) associated with the new product is 70% of revenue.

f. Marketing and Selling expense for the new product will be $600,000 per year for the duration of the project. This expenditure would start immediately (today) for launch advertising.

g. The fixed asset investment required to handle the new line of products is $10,000,000 today, and will be depreciated straight-line over four years (so, fixed assets will not be fully depreciated when the project ends). You expect to be able to sell this equipment for $3 million when the project ends at the end of year three.

h. SUPERMARs overhead expenses (maintenance team, staff support, etc.) are not expected to be affected by the new project. However, the projects share of currently existing overhead expenses will be 200,000 per year.

i. Producing the product will result in an immediate investment of $800,000 in inventory and will also result in an immediate additional $500,000 in accounts payable. During the life of the project (years 1 through 3), AR days outstanding are expected to be 30 days, inventory days will be 40 days and Accounts Payable (days) are expected to be 75 days. It is estimated that 75% of the total Operating Working Capital will be recovered at the end of the project in year 3.

j. SUPERMARs tax rate is 34%. k. You may assume that any tax credits can be used immediately by the project during its operating years. Disregard any tax effects in year=0. l. You may assume that the required return (WACC) is 16%

PART 1: Find the NPV, IRR, PI and Payback Period of this project. PART 2: Should SUPERMAR proceed? Please explain.

QUESTIONS:

Find the project's FCFs for the following years:

The Year 0 FCF is

The Year 1 FCF is

The Year 2 FCF is

The Year 3 FCF is

2- What is the project's NPV?

Please round off your answer so that there are no decimals. If your answer is 235,456.78 then type in 235457.

3- What is the project's IRR?

Please round off your answer so that there are two decimals. If your answer is 15.78% then type 16.

4- What is the project's Profitability Index?

5- What is the project's Payback Period?