Your company, (insert a company name of your choice here), is considering an opportunity to develop and introduce a new product which will trick kids into eating healthy at breakfast. The product is a breakfast treat which is actually made from all healthy ingredients and contains no added sugar..and it tastes good. Based on your superior knowledge of the market, you think that this product line will last a minimum of 5 years before the kids catch on and start eating sugar-coated sugar cubes again for breakfast (when I was a kid, there was actually a cereal called Super Sugar Crisp).

Getting up and running will cost the company $1,000,000 for capital equipment; there was an additional $400,000 for development expenses. The equipment is expected to have a useful life of 5 years (what a coincidence). The expected sales volumes are:

Year 1: 400,000

Year 2: 700,000

Year 3: 900,000

Year 4: 850,000

Year 5: 600,000

Your assignment is to figure out if this is a good idea and, of course, maximize your wealth.

A few facts:

Unit cost is $1.250

Profit margin is 37% on sell price

Corporate income tax rate is 25.8%

The companys cost of debt is 8%

You will finance the entire $1,000,000 but you do have it in cash if required; the financing will be at 9% and only 1 payment per year (5 total payments) for simplicity.

A few questions

Is this a worthwhile program to invest in?

What assumptions did you make?

Are there any alternatives at the end of 5 years?

Please use excel and explain the steps (Where numbers are coming from and which formulas are used in each step)