1. You are working with a consumer product company on estimating the expected cash flows from a new brand of toothpaste that they plan to introduce. From your prior experiences with earlier introductions of similar products, you have collected the following information: ● ● ● ● ● You are likely to sell 8 million tubes in the first year that you introduce the project, 10 million in the second year, 12 million in the third year and back down to 8 million in the fourth year. At the end of the fourth year, you will have to replace the brand with a new one. You price toothpaste at $ 3 a tube currently, and expect to increase prices at 5% a year for the next 4 years. You will have to advertise most heavily in the first year, spending $ 10 million on advertising, but you expect this to drop to $ 6 million in year 2, $ 4 million in year 3 and $2 million in year 4. Your costs associated with producing the toothpaste are $0.50 a tube currently, and you expect this to increase at 5% a year for the next 4 years. You will have to invest $ 10 million in new equipment at an old plant to create the manufacturing facilities and you expect to depreciate this expenditure straight line over the 4 years down to zero. You have a 40% tax rate. The firm's weighted average cost of capital is 12%. This is the required return on the project.
1. You are working with a consumer product company on estimating the expected cash flows from a new brand of toothpaste that they plan to introduce. From your prior experiences with earlier introductions of similar products, you have collected the following information: ● ● ● ● ● You are likely to sell 8 million tubes in the first year that you introduce the project, 10 million in the second year, 12 million in the third year and back down to 8 million in the fourth year. At the end of the fourth year, you will have to replace the brand with a new one. You price toothpaste at $ 3 a tube currently, and expect to increase prices at 5% a year for the next 4 years. You will have to advertise most heavily in the first year, spending $ 10 million on advertising, but you expect this to drop to $ 6 million in year 2, $ 4 million in year 3 and $2 million in year 4. Your costs associated with producing the toothpaste are $0.50 a tube currently, and you expect this to increase at 5% a year for the next 4 years. You will have to invest $ 10 million in new equipment at an old plant to create the manufacturing facilities and you expect to depreciate this expenditure straight line over the 4 years down to zero. You have a 40% tax rate. The firm's weighted average cost of capital is 12%. This is the required return on the project.
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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