Case Study 3 Constructed Response Answer Hocus Pocus Company wants to increase sales by adding a new product line. The company is considering three different projects. However, its capital budget is l

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

references must