Problem:
FDC has decided to offer Unicorn Cookies. My mother is giving me her old oven worth $50k. FDC thinks that the new cookie will generate $300,000 in incremental sales per year. Fixed costs will be $125,000 per year, and variable costs will be approximately 30% of sales (lots of food coloring). The additional capital investment in the kitchen equipment (that will be capitalized) needed to produce the new cookies will cost $200,000 and will be depreciated in a straight-line manner for the 4 years of the cookie's life (if you think unicorn will really last that long, I seriously hope it is already over). And, now we have working capital to think about. INVENTORY in Year 0 is $20k, in Year 1 is $40k, in Year 2 remains constant at $40k, in Year 3 it declines to $20k, and finally in Year 4 you have no inventory remaining. Ultimately, you are answering this question: do we accept the project? Answer the questions that follow to inform your final decision.