1. You are working with a consumer product company on estimating the expected cash flows from a new brand of toothpaste that they plan to introduce. From your prior experiences with earlier introductions of similar products, you have collected the following information: ● ● ● ● ● You are likely to sell 8 million tubes in the first year that you introduce the project, 10 million in the second year, 12 million in the third year and back down to 8 million in the fourth year. At the end of the fourth year, you will have to replace the brand with a new one. You price toothpaste at $ 3 a tube currently, and expect to increase prices at 5% a year for the next 4 years. You will have to advertise most heavily in the first year, spending $ 10 million on advertising, but you expect this to drop to $ 6 million in year 2, $ 4 million in year 3 and $2 million in year 4. Your costs associated with producing the toothpaste are $0.50 a tube currently, and you expect this to increase at 5% a year for the next 4 years. You will have to invest $ 10 million in new equipment at an old plant to create the manufacturing facilities and you expect to depreciate this expenditure straight line over the 4 years down to zero. You have a 40% tax rate. The firm's weighted average cost of capital is 12%. This is the required return on the project.
1. You are working with a consumer product company on estimating the expected cash flows from a new brand of toothpaste that they plan to introduce. From your prior experiences with earlier introductions of similar products, you have collected the following information: ● ● ● ● ● You are likely to sell 8 million tubes in the first year that you introduce the project, 10 million in the second year, 12 million in the third year and back down to 8 million in the fourth year. At the end of the fourth year, you will have to replace the brand with a new one. You price toothpaste at $ 3 a tube currently, and expect to increase prices at 5% a year for the next 4 years. You will have to advertise most heavily in the first year, spending $ 10 million on advertising, but you expect this to drop to $ 6 million in year 2, $ 4 million in year 3 and $2 million in year 4. Your costs associated with producing the toothpaste are $0.50 a tube currently, and you expect this to increase at 5% a year for the next 4 years. You will have to invest $ 10 million in new equipment at an old plant to create the manufacturing facilities and you expect to depreciate this expenditure straight line over the 4 years down to zero. You have a 40% tax rate. The firm's weighted average cost of capital is 12%. This is the required return on the project.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Please help me with my homeowork!:( Please explain with formulas included. Thank you!:)
Transcribed Image Text:Input Area:
Year
units
price/unit
Revenues
cost per unit
COGS
Fixed Costs (advertisement cost)
Year
01234
0
$3.00
$0.50
3
12
$3.15 $3.31 $3.47 $3.65
$25.20 $33.08 $41.67 $29.17
$0.53 $0.55 $0.58 $0.61
$4.20 $5.51 $6.95 $4.86
$10.00 $6.00 $4.00 $2.00
Beg BV Dep
10
10
7.5
5
2.5
1
8
2.5
2.5
2.5
2.5
2
10
End BV
10
7.5
5
2.5
0
4
8
Output Area:
Year
Revenues
COGS
Fixed Costs
Dep
EBIT
Taxes(40%)
NI
OCF
Year
OCF
Cap Spending
Total CF
PV @ 12%
NPV =
Pro Forma Income Statements
Total Cash Flow
0
1
2
2
3
Transcribed Image Text:1. You are working with a consumer product company on estimating the expected
cash flows from a new brand of toothpaste that they plan to introduce. From your
prior experiences with earlier introductions of similar products, you have
collected the following information:
●
You are likely to sell 8 million tubes in the first year that you introduce the project,
10 million in the second year, 12 million in the third year and back down to 8
million in the fourth year. At the end of the fourth year, you will have to replace
the brand with a new one.
You price toothpaste at $3 a tube currently, and expect to increase prices at 5% a
year for the next 4 years.
You will have to advertise most heavily in the first year, spending $ 10 million on
advertising, but you expect this to drop to $ 6 million in year 2, $ 4 million in year
3 and $2 million in year 4.
Your costs associated with producing the toothpaste are $0.50 a tube currently, and
you expect this to increase at 5% a year for the next 4 years.
You will have to invest $ 10 million in new equipment at an old plant to create the
manufacturing facilities and you expect to depreciate this expenditure straight line
over the 4 years down to zero.
You have a 40% tax rate.
The firm's weighted average cost of capital is 12%. This is the required return on
the project.
What is the NPV?
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