USE THE FOLLOWING INFORMATION TO ANSWER THE QUESTIONS Atlanta Cookie (A Cookie) wishes to purchase a...

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USE THE FOLLOWING INFORMATION TO ANSWER THE QUESTIONS Atlanta Cookie (A Cookie) wishes to purchase a cookie making system that requires the purchase of a mixer costing $42,500 and an oven costing $35,000. This new cookie making system project is expected to meet the firm's growing demand for fabulous, fat- free cookies for the foreseeable future. The firm plans to use a 12% cost of capital to evaluate the project. The before tax annual cookie sales revenues over the life the project are shown in the following table: Year Estimated Sales Revenue 1 $ 70,000 1 2 $ XXXXXXXXXX $160,000 4 $163,000 5 S 92,000 It is expected that the system will have a zero salvage value and be depreciated straight line over its five-year life. The equipment is not expected to have a market value in five years. The company will get bank financing at a rate of 8% effective annual interest rate for the initial investment. After purchasing the new cookie making system, A Cookie will hire Emanuel Jackson to maintain, operate and train other employees on how to use the new equipment. Emanuel will require a salary and benefits totaling $70,000 per year. Emanuel previously worked for the consulting company that recommended this system to A Cookie. A Cookie paid Emanuel's firm $30,000 to determine which system was ideally suited for them. Flour, sugar butter and other ingredients are estimated to cost 20% of sales annually. The system is so terrific it is believed that A Cookie's baking process will become the industry standard and open new distribution channels, however, the initial cost of setting up these new distribution channels is estimated to be $50,000. The increases in sales from the new customers are incorporated in the estimated sales revenue estimates above. The firm estimates that the project will require an increase in net working capital of $4,000, which will be recovered at the end of the life of the project. The company is in the combined 40% state and federal tax brackets. 1) What is the NPV for the project? 2) Should you accept the project (assuming you accept only profitable projects)?

Rinki · Accepted Answer

2
	Initial Cash flow
	Amount
	Mixer
	42500
	Oven
	35000
	Emanuel's firm
	30000
	New Distribution Channel
	50000
	Net Working Capital
	4000
	TOTAL INITIAL CASH FLOW
	161500
LOAN @ 8% FOR INITIAL CASH FLOW                                                                                       161500
	YEAR
	SALES (A)
	COST @ 20% OF SALES (B)
	SALARY EMANUEL ©
	DEPRICIATION WN (1) (D)
	EBIT (A-B-C-D)
	1
	70000.00
	14000.00
	70000.00
	15500.00
	-29500.00
	2
	112000.00
	22400.00
	70000.00
	15500.00
	4100.00
	3
	160000.00
	32000.00
	70000.00
	15500.00
	42500.00
	4
	163000.00
	32600.00
	70000.00
	15500.00
	44900.00
	5
	92000.00
	18400.00
	70000.00
	15500.00
	-11900.00
	TOTAL
	597000.00
	119400.00
	350000.00
	77500.00
	50100.00
	YEAR
	EBIT (E )
	INTEREST WN (2) (F)
	EAT (E-F)
	TAX @ 40% (G)
	EAT (E-G)
	1
	-29500.00
	12920.00
	-42420.00
	-16968.00
	-25452.

USE THE FOLLOWING INFORMATION TO ANSWER THE QUESTIONS Atlanta Cookie (A Cookie) wishes to purchase a cookie making system that requires the purchase of a mixer costing $42,500 and an oven costing...

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