Create a presentation that you will make to management. Use the following assumptions:
Assume the risk-adjusted cost of capital is 12%, compute net present value (NPV) for each proposal. Include the cash flows from salvage value and the tax benefits of depreciation (assume 5-year straight-line). Incorporate the research data and graphs and charts into your presentation for support to your recommendation.
Include in your presentation recommendations on the product line for senior management? Specify how your recommendation is affected by your assumptions for cost of capital and expected contribution margin (that is, perform a sensitivity analysis)?
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Proposal 1 Proposal 2
New product line Mid-level Mountain Bike Entry-level Hybrid Bike
Estimated first year revenues $600,000 $800,000
Estimated annual revenue growth 6% 4%
Estimated Contribution margin % 40% 45%
Marginal Tax Rate (for tax benefit
calculation) 40% 40%
Estimated annual fixed costs $120,000 $100,000
Investment in Facility
(expected salvage in year 6 of $400,000)
$1,500,000 $1,275,000
One-time advertising (year 0) $140,000 $150,000
Component inventory
(value returned in full in year 6) $150,000 $125,000