Solution Library

A Professional Written Memo of SNAP Cosmetics Company

Question

SNAP Cosmetics, Inc. is contemplating building a new plant to manufacture a new metallic cosmetic products line. The cost to build the plant is $75 million and the plant is expected to last for 20 years. This cost can be depreciated over the full 20-year life of the plant using straight line depreciation. The total salvage value of the plant is $2 million, in nominal terms, at the end of year 20 and is attributed to the original expenditure on the plant for tax purposes.

The attached table shows, in nominal dollars, the annual revenues less costs of goods sold (COGS) for the proposed metallic product line in its first operating year. Revenues and COGS are expected to grow at 4% per year in nominal terms for the first 10 years of the plant’s life and then 0% in nominal terms for the remainder of the plant’s life. In addition, the plant will be built on land that is owned by SNAP Cosmetics, which could be rented out for $500,000 per year in nominal terms before taxes during the 20 years the plant is operating.

The total working capital requirements are $10 million in the first year and are expected to remain constant in nominal terms in each subsequent year. When the plant ceases production in year 20 all the working capital can be recovered.

The rate of inflation is expected to be 2% per year for the entirety of the plant’s life. SNAP Cosmetics’ total tax rate is 40%. Its opportunity cost of capital for projects of this type is 14% in nominal terms. Assume all cash flows occur at year’s end.

Please prepare a professional written memo (including any tables, which should have appropriate labels and legends). In the first sentence of your write-up, state the NPV of the metallic cosmetic plant and whether SNAP cosmetics should build the plant. Write-up should include a graphic of the cash flows associated with the plant over time and, if necessary, carefully state any additional assumptions that you make in order to solve the problem

Gross Margin Analysis of Proposed Metalllic Cosmetics Line, as of 12/31/2015

 

 

Summary: This question belongs to finance and discusses about a cosmetic company’s financials and asked to prepare a professional written memo which includes cash flows and all the necessary information.

Total word count: 777

 

Download Full Solution

Comments

  • HWA
    Rasha

    this is a very good website

  • HWA
    maani

    I have 50 questions for the same test your page is showing only 28

  • HWA
    joeanne

    hi can you please help or guide me to answer my assignments. thanks

  • HWA
    joeanne

    hi can anyone help or guide me to my assignments. thanks

  • HWA
    Monik


  • HWA
    Cristina

    This solution is perfect ...thanks

  • HWA
    Janete

    Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

  • HWA
    Sandeep

    Perfect bank of solution. 

  • HWA
    Oxana

    great !

  • HWA
    Paul Brandon-Fritzius

    thanks for the quick response. the solution looks good. :)

  • HWA
    tina Johnson

    thnx for the answer. it was perfect. just the way i wanted it. 

  • HWA
    Giuseppe

    works fine.