Bliss Bar is a company that sells deluxe chocolate and candy bars based in Illinois. The company is considering launching a new product line featuring protein bars coated with their deluxe chocolate flavors. Bliss Bar has spent $75,000 developing a new protein bar line as a part of the company’s product diversification plan. It also spent another $40,000 for
Based on market research, Bliss Bar expects to sell 1,200,000 protein bars at a price of $2.45 per unit over each of the next six years, with an expected annual growth of 3% in sales volume. The variable costs per unit are $0.80, and the annual fixed costs are $30,000. Bliss Bar estimates that the net working capital will be 8% of next year’s sales. Assume all net working capital will be recovered at the end of the project.
The launch of this new product line is expected to cannibalize the sales of an existing candy bar, Choco-O! by 10,000 units per year. Choco-O! is sold at a price of $2 per unit and has variable costs of $0.50 per unit.
To expand production capacity for this new product line, Bliss Bar is required to have an initial investment of $700,000 in factory equipment. The equipment will be
The company’s tax rate is 20%, and its cost of capital is 7.6%. However, the finance team suggests that the appropriate project discount rate should be higher as the company has no prior experience in making protein bars. The current market premium is 7%, and the risk free rate is 4%. Bliss Bar’s beta is 1.2, and the project is deemed to be 3 times riskier.
What will be the annual tax shield from the factory equipment?
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