Assuming PepsiCola, Atlanta is considering of giving its main rival a strong competition, in the launch of a product (two-in-one beverage) for a new market. The company requires an amount of $15,000,000.00 as the initial cost of plant/equipment for the products developed by its R&D research group to cover the project life cycle of eight years. For each year, 500,000 units would be produced. The selling price of a unit of the new product is $8.50. It is expected that in year two (2), the selling price of a unit will increase by 25%; year three (3) the unit will be selling by a further increase by 10% from year two (2)s selling price. From year four (4), the selling price will decrease by 5% from year three (3)s selling price and the subsequent years will stabilize or remain till the end of the project life and further. The production department estimated cost of each unit for 1st year as $2.75, it will increase in 2nd year by 25%; In the 3rd year, will increase by 10% from the previous cost; In the 4th year, will decrease by 5% from the previous cost price; and for the subsequent years, the cost of each unit will stabilize from the previous year’s price till the end of the project life and further. Note: The cost of capital is 12%. Selling, General and Administration costs for the first year is $340,000.00 and for the rest of the period, it will increase by 10% from each previous year cost. Fixed cost for each year is $60,000.00 Depreciation expense is $1,875,000.00 and remains same for the future years. Interest expense is $462,000.00 for year one, for year two $400,000.00, for year three $361,500.00, for year four $150,000.00, for year five $125,000, for year six $120,000.00 for year seven $112,000.00 and for year eight $75,000.00 Tax rate 38% throughout the entire period. You are required to calculate Payback period and What method of deprecation did PepsiCola, Atlanta used in the proposal?
Assuming PepsiCola, Atlanta is considering of giving its main rival a strong competition, in the launch of a product (two-in-one beverage) for a new market. The company requires an amount of $15,000,000.00 as the initial cost of plant/equipment for the products developed by its R&D research group to cover the project life cycle of eight years.
For each year, 500,000 units would be produced.
The selling price of a unit of the new product is $8.50. It is expected that in year two (2), the selling price of a unit will increase by 25%; year three (3) the unit will be selling by a further increase by 10% from year two (2)s selling price. From year four (4), the selling price will decrease by 5% from year three (3)s selling price and the subsequent years will stabilize or remain till the end of the project life and further.
The production department estimated cost of each unit for 1st year as $2.75, it will increase in 2nd year by 25%; In the 3rd year, will increase by 10% from the previous cost; In the 4th year, will decrease by 5% from the previous cost price; and for the subsequent years, the cost of each unit will stabilize from the previous year’s price till the end of the project life and further.
Note: The cost of capital is 12%.
- Selling, General and Administration costs for the first year is $340,000.00 and for the rest of the period, it will increase by 10% from each previous year cost.
- Fixed cost for each year is $60,000.00
Depreciation expense is $1,875,000.00 and remains same for the future years.- Interest expense is $462,000.00 for year one, for year two $400,000.00, for year three $361,500.00, for year four $150,000.00, for year five $125,000, for year six $120,000.00 for year seven $112,000.00 and for year eight $75,000.00
- Tax rate 38% throughout the entire period.
You are required to calculate Payback period and
What method of deprecation did PepsiCola, Atlanta used in the proposal?
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The second solution is well noted. However, please clarify why the interest expense was ignored in your computation.
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