Question

A business opportunity has presented itself to you and one of your classmates. Your opportunity is to enter the fast-growing craft beer industry. Your projected sales in the first year is 7500 kegs. Your projected growth rate is 5 percent. Entering the business will require $35,000 of net working capital. Total fixed costs are $95,000. Variable production costs are $32 per keg and keg sales are priced at $56 each. The equipment to begin production is $175,000. The equipment will be depreciated using straight line depreciation over a five year life and has no salvage value. The tax rate is 35 percent and the required return is 23 percent. What is the NPV of the project and should you pursue the project?

Multiple Choice answers given are:

$18,991.73 Yes, take the project.

$35,512.45 Yes, take the project.

-$15,351.31 No, do not take the project.

$8,695.45 Yes, take the project.

Answer 1