You are a profitable conglomerate thinking about getting into the gelati business for now and for the next ten years

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You are a profitable conglomerate thinking about getting into the gelati business for now and for the next ten years.  After that, you expect that health experts will advise people to only eat ice cream in the metaverse making the business no longer viable at that point. You paid a consultant $500,000 for a feasibility study that generated the current information for you and pure play gelati businesses that is described below. You can obtain an immediate 10% share of the gelati market. Gelati sales include 1500 million scoops per year at an average price of $4 per scoop, 200 million cones at an average incremental price of $2, and $100 million in other gelati-related items. These figures are flat annual numbers for the next ten years. But since you currently sell frozen confectionary items, this investment would cannibalize your total sales by 6%. Costs of Goods for all items are 60% of sales. Operating expenses for this venture will be $100 million annually. But these operations will improve upon a new production process that you are implementing for your existing business. You will be able to synergistically cut your firm’s operating expenses by $100 million; whereas, your current efficiency plan would have cut them by $50 million per year. Your accountants tell you that $20 million in overhead will be allocated to the new business annually but only half of this is variable – the other half are fixed overhead costs. Net Working Capital is 10% of all sales.

In order to undertake this project, you need to invest $200 million in CAPX to be depreciated straight-line over the life of the project. This is on top of land purchased last year in preparation for this venture for the amount of $20 million. This land whose only value for you pertains to the gelati business is currently valued at $25 million. The salvage value for the whole business in ten years is expected to be $30 million at that time. Your annual figures are flat for the ten year project. 

 

Note:  The corporate tax rate is 20%.  Assume that all cash flows are year-end except for the up-front investment.  You will finance the project appropriately with $50 Million in AAA debt. Assume beta of debt = 0.  

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