Wok-A-Mole is a restaurant chain serving Chinese-Mexican fusion dishes. The owne

Question

Wok-A-Mole is a restaurant chain serving Chinese-Mexican fusion dishes. The owners are considering a new entree, Sesame Chicken Enchiladas. They plan to test this new product by introducing it for a limited 2-year period, during which they expect to sell 20,000 units per year. However, the new dish is expected decrease sales of their most popular dish, General Tso's Tacos, by 5,000 units per year. Both dishes are priced at $10 per unit, and each has a variable cost of $3.50 per unit. The project would require a 1-time investment of $15,000 today for marketing expenses. Alternatively, Wok-A-Mole could sell the flavor to a competitor today for an estimated $100,000 today rather than developing the new product itself. If Wok-A-Mole's tax rate is 35%, and the cost of capital for the project is 8.7%, what it the NPV for the Sesame Chicken Enchiladas project?

ANSWER AND DETAILS.

Explanation / Answer

Sales For new entree = 20,000*10 = $ 200,000

Costs For new entree = 3.5*20,000 = $ 70,000

Money Lost for old Product = 5000*(10-3.5) = $ 32,500

Now tax rate = 35 % so we have

Cash Flows / year = (200,000 - 70,000- 32500 )*(1- 0.35) = $ 63,375

NPV (of cash flows) = -15,000 + 63,375/1.087 + 63,375/1.087^2 = $96,938.977

Present worth = $100,000

so If he undertakes it loss (NPV) = 96,938.977 - 100,000 = $3061.02

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.