Problem:
Brand Name Foods, Inc. has spent $8 million developing a new line of microwaveable meals. Production engineers estimate it will cost $4 million to retrofit existing plants to produce this product line. The marketing department suggests that the present value of net profits from all future sales of meals will be $10 million. On the basis of these numbers, management is recommending dropping the project since all costs will exceed net profits.
(a) Do you agree with this recommendation? Explain.
(b) The head of the accounting department indicates that if the meals are produced and marketed, $4 million of corporate overhead expenses will be assigned to the product. Does this new information change your answer to (a)? Explain.
Additional Information:
The question is from Finance as well as it is about retrofitting a production line with new production technique which is about half the cost of current production line. This recommendation has been reviewed with explanation about whether or not it is advisable to retrofit the production line.