XYZ Foods is considering producing a new candy, Tira-Tira. XYZ has spent two years and P450,000 developing this product. XYZ has also test marketed Tira-Tira, spending P100,000 to conduct consumer surveys and tests of the product in 25 states. Based on previous candy products and the results in the test marketing, management believes consumers will buy 4 million packages each year for ten years at 50 cents per package. Equipment to produce Tira-Tira will cost XYZ P1,000,000, and P300,000 of additional net working capital will be required to support Tira-Tira sales. XYZ expects production costs to average 60% of Tira-Tira’s net revenues, with overhead and sales expenses totaling P525,000 per year. The equipment has a life of ten years, after which time it will have no salvage value. Working capital is assumed to be fully recovered at the end of ten years. Depreciation is straight-line and XYZ’s tax rate is 45%. The required rate of return for projects of similar risk is 10%.   A. What is the initial investment from this project? B. What is the NPV of this investment? Should XYZ Foods produce this new candy? C. Suppose that competitors are expected to introduce similar candy products to compete with Tira-Tira, such that peso sales will drop following the first-year. What is the maximum drop in sales annually from this product for year 2 onwards and still make this a viable investment?

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
icon
Related questions
icon
Concept explainers
Question
100%

XYZ Foods is considering producing a new candy, Tira-Tira. XYZ has spent two years and P450,000 developing this product. XYZ has also test marketed Tira-Tira, spending P100,000 to conduct consumer surveys and tests of the product in 25 states.

Based on previous candy products and the results in the test marketing, management believes consumers will buy 4 million packages each year for ten years at 50 cents per package. Equipment to produce Tira-Tira will cost XYZ P1,000,000, and P300,000 of additional net working capital will be required to support Tira-Tira sales. XYZ expects production costs to average 60% of Tira-Tira’s net revenues, with overhead and sales expenses totaling P525,000 per year. The equipment has a life of ten years, after which time it will have no salvage value. Working capital is assumed to be fully recovered at the end of ten years. Depreciation is straight-line and XYZ’s tax rate is 45%. The required rate of return for projects of similar risk is 10%.

 

A. What is the initial investment from this project?

B. What is the NPV of this investment? Should XYZ Foods produce this new candy?

C. Suppose that competitors are expected to introduce similar candy products to compete with Tira-Tira, such that peso sales will drop following the first-year. What is the maximum drop in sales annually from this product for year 2 onwards and still make this a viable investment?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 6 steps with 2 images

Blurred answer
Knowledge Booster
Cost volume profit (CVP) analysis
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education