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CT-1 LO 134 Hocus Pocus Company wants to increase sales by adding a new product...

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CT-1 LO 134 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 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 $1,170,000 Magic Wands $983,000 Crystal Balls $2,210,000 Net Initial Investment Budgeted Income Statement for the next five years: Sales Cost of Goods Sold Gross Margin Marketing and Administrative Expenses Net Income* $500,000 80,000 420,000 100,000 ? $450,000 50,000 400,000 130,000 $650,000 32,000 618,000 22,000 ? ? *Assume all amounts stated on the budgeted income statement are cash items. Required a) Determine the net present value for each project assuming all cash flows cease after five years. b) Which project should Hocus Pocus invest in and why? 298

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