The Fizzy Beverage Co. is considering two alternative capital projects. Project 1: expansion of its existing traditional line of Fizzy beverages. Project 2: introduction of a new “healthy” line of beverages. The company has already spent $1,400,000 on research into the feasibility of these projects and has arrived at the following financial projections. · Both projects are estimated to have a life of 5 years. The required fixed asset investment or capital spending for project 1 is $30,000,000 and for project 2 is $35,000,000. Fixed assets will be depreciated straight line to zero. Fixed asset salvage value estimate for project 1 is $6,200,000 and for project 2 is $8,500,000 · In order to support anticipated sales, either project will require an increase in inventory of $8,600,000, an increase in accounts receivable of $2,800,000, and an increase in accounts payable of $6,300,000 · Cost of goods sold is projected at 35% of sales for either project. Selling, general and administrative (SG&A) expenses for project 1 is 12% of sales and for project 2 is 15% of sales. The higher SG&A % for project 2 is due to higher anticipated marketing expenses · The cost of capital applicable to either project is estimated at 8%. The firm’s corporate tax rate is 35% The sales projections for both projects are as follows: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project 1: Traditional (Fizzy) Line 14,500,000 15,500,000 16,200,000 16,700,000 17,000,000 Project 2: "Healthy" Line 17,500,000 18,500,000 19,400,000 19,800,000 20,500,000
The Fizzy Beverage Co. is considering two alternative capital projects. Project 1: expansion of its existing traditional line of Fizzy beverages. Project 2: introduction of a new “healthy” line of beverages. The company has already spent $1,400,000 on research into the feasibility of these projects and has arrived at the following financial projections. · Both projects are estimated to have a life of 5 years. The required fixed asset investment or capital spending for project 1 is $30,000,000 and for project 2 is $35,000,000. Fixed assets will be depreciated straight line to zero. Fixed asset salvage value estimate for project 1 is $6,200,000 and for project 2 is $8,500,000 · In order to support anticipated sales, either project will require an increase in inventory of $8,600,000, an increase in accounts receivable of $2,800,000, and an increase in accounts payable of $6,300,000 · Cost of goods sold is projected at 35% of sales for either project. Selling, general and administrative (SG&A) expenses for project 1 is 12% of sales and for project 2 is 15% of sales. The higher SG&A % for project 2 is due to higher anticipated marketing expenses · The cost of capital applicable to either project is estimated at 8%. The firm’s corporate tax rate is 35% The sales projections for both projects are as follows: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project 1: Traditional (Fizzy) Line 14,500,000 15,500,000 16,200,000 16,700,000 17,000,000 Project 2: "Healthy" Line 17,500,000 18,500,000 19,400,000 19,800,000 20,500,000
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
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| The Fizzy Beverage Co. is considering two alternative capital projects. Project 1: expansion of its existing traditional line of Fizzy beverages. Project 2: introduction of a new “healthy” line of beverages. The company has already spent $1,400,000 on research into the feasibility of these projects and has arrived at the following financial projections. | ||||||||||||
| · Both projects are estimated to have a life of 5 years. The required fixed asset investment or capital spending for project 1 is $30,000,000 and for project 2 is $35,000,000. Fixed assets will be depreciated straight line to zero. Fixed asset salvage value estimate for project 1 is $6,200,000 and for project 2 is $8,500,000 | ||||||||||||
| · In order to support anticipated sales, either project will require an increase in inventory of $8,600,000, an increase in accounts receivable of $2,800,000, and an increase in accounts payable of $6,300,000 | ||||||||||||
| · Cost of goods sold is projected at 35% of sales for either project. Selling, general and administrative (SG&A) expenses for project 1 is 12% of sales and for project 2 is 15% of sales. The higher SG&A % for project 2 is due to higher anticipated marketing expenses | ||||||||||||
| · The cost of capital applicable to either project is estimated at 8%. The firm’s corporate tax rate is 35% | ||||||||||||
| The sales projections for both projects are as follows: | ||||||||||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |||||||
| Project 1: Traditional (Fizzy) Line | 14,500,000 | 15,500,000 | 16,200,000 | 16,700,000 | 17,000,000 | |||||||
| Project 2: "Healthy" Line | 17,500,000 | 18,500,000 | 19,400,000 | 19,800,000 | 20,500,000 |
Transcribed Image Text:The Fizzy Beverage Co. is considering two alternative capital projects. Project 1: expansion of its existing traditional line of Fizzy beverages. Project 2: introduction of a new "healthy" line of beverages. The company has already spent
$1,400,000 on research into the feasibility of these projects and has arrived at the following financial projections.
Both projects are estimated to have a life of 5 years. The required fixed asset investment or capital spending for project 1 is $30,000,000 and for project 2 is $35,000,000. Fixed assets will be depreciated straight line to zero. Fixed asset
salvage value estimate for project 1 is $6,200,000 and for project 2 is $8,500,000
In order to support anticipated sales, either project will require an increase in inventory of $8,600,000, an increase in accounts receivable of $2,800,000, and an increase in accounts payable of $6,300,000
Cost of goods sold is projected at 35% of sales for either project. Selling, general and administrative (SG&A) expenses for project 1 is 12% of sales and for project 2 is 15% of sales. The higher SG&A % for project 2 is due to higher
anticipated marketing expenses
.
The cost of capital applicable to either project is estimated at 8%. The firm's corporate tax rate is 35%
The sales projections for both projects are as follows:
Year 0
.
Project 1: Traditional (Fizzy) Line
Project 2: "Healthy" Line
Year 5
Year 1
Year 2
Year 3
Year 4
14,500,000 15,500,000 16,200,000 16,700,000 17,000,000 79,900,000 9588000
17,500,000 18,500,000 19,400,000 19,800,000 20,500,000 95,700,000
Evaluate the two capital investment project alternatives and make your recommendation using:
a). Net Present Value (NPV)
b). Internal Rate of Return (IRR)
c). Modified Internal Rate of Return (MIRR)
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