Case Study 3 Constructed Response Answer Hocus Pocus Company wants to increase sales by adding a new product line. The company is considering three different projects. However, its capital budget is limited to $1,500,000. In addition, the company requires a rate of return of 10%. The information concerning the three product lines is given below. Net Initial Investment Budgeted Income Statement for the next five years: Sales Cost of Goods Sold Gross Margin Marketing and Administrative Expenses Net Income Broomsticks $1,170,000 $500,000 80,000 420,000 100,000 ? Magic Wands $983,000 *Assume all amounts stated on the budgeted income statement are cash items. $450,000 50,000 400,000 130,000 ? Crystal Balls $2,210,000 Required a) Determine the net present value for each project assuming all cash flows cease after five years. $650,000 32,000 618,000 22,000 ?

Case Study 3 Constructed Response Answer Hocus Pocus Company wants to increase sales by adding a new product line. The company is considering three different projects. However, its capital budget is limited to $1,500,000. In addition, the company requires a rate of return of 10%. The information concerning the three product lines is given below. Net Initial Investment Budgeted Income Statement for the next five years: Sales Cost of Goods Sold Gross Margin Marketing and Administrative Expenses Net Income Broomsticks $1,170,000 $500,000 80,000 420,000 100,000 ? Magic Wands $983,000 *Assume all amounts stated on the budgeted income statement are cash items. $450,000 50,000 400,000 130,000 ? Crystal Balls $2,210,000 Required a) Determine the net present value for each project assuming all cash flows cease after five years. $650,000 32,000 618,000 22,000 ?

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter13: Financial Statement Analysis

Section: Chapter Questions

Problem 13.3AP

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