Case Study 3 Constructed Response AnswerHocus 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.
Broomsticks magic wands crystal balls
Net initial investment $1,70,000 $983,000 $2,210,000
Budgeted income statement
for the next five years :
sales $500.000 $450,000 $650,000
cost of goods sold 80,000 50,000 32,000
gross margin 420,000 400,000 618,000
marketing and administrative 100,000 130,000 22,000
expenses
net income* ? ? ?
* assume all amounts stated on the budgeted income statement are cash items.
Que a) Determine the net present value for each project assuming all cash flows cease after five years.
case study constructed response answer a
Que b) why project should Hocus Pocus invest in and why ?
case study constructed response answer b
Que) c If Hocus Pocus had a capital budget limit of 2,300,000 how should they invest it ??
case study constructed response answer c
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