How to make a recommendation on which new products to launch by integrating the principles of capital budgeting decision making?

Analysis for New Product Launches :

– How to analyze each product’s projected cash flow over a 5-year period?

-*Access up to $30 million dollars from your financiers.

*Loan interest rate 6% *Investor expect a return of 12% on their equity.

*Based on the required returns on equity and debt, the company’s weighted average cost of capital is 9.45%.

*On all projects, assume a 30% tax rate on income.

Product 1:

-First year sales are projected to be $15 million with a 10% increase in revenue each year over the next 5 years.

-In the prior two years your company has spent $1 million on the development of this project. To finish the development and create the manufacturing infrastructure to produce it, It is estimated to need another $20 million in equipment purchases. This equipment has a 5-year life.

– Cost of goods sold will be 45% of revenue.

– Incremental SG&A will be 15% of revenue.

– Working capital requirements will be 8% of revenue.

– one-time advertising budget of $2.5 million, which will be spent in the first year of sales.

Product 2:

– Prior years’ development cost for this product has totaled $1.5 million dollars.

– $10 million dollars in new equipment purchases to manufacture this product. The economic life of this equipment is also 5 years.

-forecasts first year revenue at $9.5 million

-one time marketing expense of $1.25 million -revenue is expected to increase by 7% year over year for the next 5 years.

-costs of goods sold will be 55% of revenue. -Incremental SG&A will be 13% of revenue

-Working capital requirements will be 10% of revenue.

Product 3:

– Your finance team believes that it will provide an additional $50,000 of cash flow per year in 5-year time period.

-Revenue projections will be $4 million in the first year of sales.

-sales projected to increase by only 2% per year over the next five years.

-require an additional $6 million of capital for equipment with use life 7 years.

-costs of goods sold will be 55% of revenue. -Incremental SG&A will be 13% of revenue

– Working capital requirements will be 12% of revenue.

 

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