Blue Mountain Ltd manufactures a variety of snacks.

Blue Mountain Ltd manufactures a variety of snacks. The company is considering introducing
a new product. The company’s manager has been provided with the following information by
their business analyst.
• An environmental impact study has been undertaken at a cost of $300,000. This
indicates that the project is environmentally sustainable, but the project still needs to
be evaluated to see if it is economically viable.
• The project will require the use of storage capacity owned by the company. If not used
for the project, this could be rented out for $87,000 per year.
• The project will generate waste products which can be used by another of the firm’s
operations, saving that operation $95,000 per year in raw material purchases.
• The project has an anticipated economic life of 7 years.
• The Company plans to spend $2,500,000 on advertising campaign to boost sales.
• The Company’s interest expense each year will be $1,160,000.
• The Company is required to purchase a new machine to produce the new product. The
machine’s initial cost is $12,000,000. The machine will be depreciated on a straight –
line basis over 6 years. The Company anticipates that the machine will last for 10 years;
the salvage value after 6 years is $1,300,000.
• Six months ago, the Company also paid $860,000 to a firm to do research regarding
new product.
• If the Company goes ahead with the new product, it will influence on the Company’s
net operating capital. The forecasted net working capital will be $600,000 (at time
zero)
• The new product is expected to generate sales revenue of $2,600,000; $4,600,000;
$6,600,000; $8,600,000, $10,600,000, 10,000,000 and 9,600,000 in year 1, 2, 3, 4, 5, 6
and 7 respectively. Each year the operating cost (not including depreciation) expected
to equal 23 percent of sales revenue.
• In addition, the Company expects with introduction of new product, sale of other
snacks products increases by $1,160,000 after taxes each year.
• The Company’s overall WACC is 6.6%. However, the proposed project is riskier than
the average project; the new project’s WACC is estimated to be 7.5%.
• The Company’s tax rate is 30 percent.
Find the net present value, internal rate of return, payback, and profitability index of the
proposed project. Based on your analysis should the project be accepted?