Burger King is planning to add a mango milkshake to its menu.The company tested the product in three major cities last year at acost of $2 million and determined that there is considerabledemand. At present, they only plan to sell the mango shakes for 5years. Burger king plans to price this new flavor at $2 per shakeand they anticipate selling 10 million mango shakes each year.Large quantities of mango trees will need to be purchasedimmediately at a total cost of $20 million. This will be a capitalexpense which Burger Kings will depreciate on a straight line basisto a value of zero over the next 5 years. Unfortunately, BurgerKing learned during the test market that the mango shakes will eatinto the sales of their vanilla shakes. They only expect thishappen during the first year though, when they expect to lose $4million in sales of vanilla shakes from what they otherwise wouldhave had. Both the vanilla and mango shakes have variable costequal to 60% of their purchase price. The additional business fromthe new product will necessitate an injection of $1 million in networking capital immediately. Burger King expects that level ofworking capital to remain constant during the 5 years that themango shakes are sold and then they expect to recover it at the endof the 5th year. Burger King’s stock is selling at $25 per shareand it has a beta of 0.9. The risk free rate is 3% and the marketrisk premium 5.7%. The company has $240 million shares of commonstock outstanding and debt (Bonds) with a face value of $800million. All of its bonds will mature in 13 years are priced at102, and have a coupon rate of 6.4%. Burger King’s marginal taxrate is 21%. Determine the free cash flows for this project andshow them on the time line provided (in millions) below. Thencalculate the WACC and the NPV. All cash flows should be discountedat the WACC.
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Please note above: number of bonds/shares outstanding is 240million!!
