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"Randy’s" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint ice-cream ", which will include real strawberries

#### "Randy’s" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint ice-cream ", which will include real strawberries

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"Randy’s" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint ice-cream ", which will include real strawberries. To manufacture the product, Randy’s will have to buy a strawberries processor machine. In addition, since the old ice-cream machine of the company broke down it has to replace it with a new one. Below is the purchasing information about the two machines:

- A strawberries processor machine: The machine costs $500,000 and is depreciated in a straight line over 4 years. This machine has a salvage value of $30,000.

- A new ice-cream machine: The machine costs $850,000 and is depreciated in a straight line over 5 years. This machine has a scrap (salvage) value of $200,000**.**

**Other information:**

? The strawberry mint ice-cream project's estimated lifecycle is 5 years.

? Randy’s estimates that in the first year the Product will have revenues of $1 million, and then revenues are expected to increase by 12% annually.

? Production costs are expected to be 60% of the revenues.

? Marketing costs are expected to be 30% of the revenues in the first year and then after 10% of the revenues in the following years.

? At the end of year 5 Randy’s estimates that it will be able to sell the strawberries process machine for $120,000. The ice-cream machine will worth 0 and therefore will not be sold.

? During the last 5 years, Randy’s has spent $20,000 in the development of the strawberry mint ice cream.

? To support the project, Randy’s will need to invest in working capital. The company will need to invest at the beginning of each year in inventory 10% of the expected revenues in the following year, in accounts receivables 25% of the current year’s revenues. Accounts payable will amount to 15% of the cost of goods sold at the beginning of each year. All the working capital will be recovered at the end of the project in 5 years.

? Randy’s corporate tax is 25% and Capital gain tax is 20%.

? Randy’s cost of capital is 13%.

**Should Randy’s undertake the project?**