Chapter 11, Problem 1MC

Summary Introduction

Case summary:

Company E is an international soft drinks empire considering and reviewing the investment plans by expanding its operations. The manager of company E expected to launch in the product in place I. It involves the capital outlay of $20 million for building a plant and distribution system.

Fixed costs are estimated as $3 million per year and variable costs would be 12% per liter. It expects a return of 25% in nominal dollar terms.

The sales of the company have forecasted to be 35% per liter and taxes paid to government at the rate of 30%. Company trying to forecast the sales by following ‘1-2-4’ rule. Product S is the close competitor for Company E product. It would also face the similar costs of Company E. It is also interested to enter into the market place where Company E has trying to establish.

To determine: Net present value of proposed project and to know sensitive of NPV to future sales volume.