You’re the CFO of the tech company, BubblePop. Your CMO (Chief Marketing Officer) is
proposing a new product called APPKiller that will be sold online for $10 per unit. The CMO
expects sales of 100,000, 110,000, 120,000, 90,000 and 70,000 units over the products 5 year
life. COGS is 20% of sales and operating expenses are estimated at $350,000 per year. The
company’s tax rate is 30%.
The initial investment in the project is as follows.
$1,000,000 for fixed equipment machinery
$200,000 in initial raw materials
The machinery is depreciated over 8 years straight-line ($125,000 per year).
At the end of 5 years, the product is expected to become obsolete. The machinery will be sold
off for $600,000 at that time. Raw materials will be sold off netting the company the $200,000
back that they had originally invested.
FYI, the company has already spent $75k on an overpriced consultant last year analyzing this
deal. (I heard he was a college professor in RI).
Oh, and about their WACC……
The company’s stock is trading for $20 per share. There are 50,000 shares outstanding.
Company beta is 2.0. The market risk premium is 6% and the risk free rate of return is
3%.
Corporate debt matures in 2020 and is trading at 90% on 800 bonds with a par value of
$1,000. The coupon rate is 10%. The bonds pay coupons semi-annually (2x per year).
The company has a small amount of Preferred stock. 2,000 shares trading at $90. Par
value is $100 and annual income on the Preferred stock is 9.5%.
Using NPV, should the company invest in the APPKiller project?
