Homework Help is Here – Start Your Trial Now!
Business
Finance
CAPITAL BUDGETING AND CASH FLOW ESTIMATION Allied Food Products is considering expanding into the fruit juice business with a new fresh lemon juice product. Assume that you were recently hired as assistant to the director of capital budgeting, and you must evaluate the new project. The lemon juice would be produced in an unused building adjacent to Allied's Fort Myers plane, Allied owns the building, which is fully depreciated. The purchase price of the required equiphiente is $280,000, including shipping and installation costs, and the equipment is eligjble for 190% PONYS depreciation at the time of nurcho

CAPITAL BUDGETING AND CASH FLOW ESTIMATION Allied Food Products is considering expanding into the fruit juice business with a new fresh lemon juice product. Assume that you were recently hired as assistant to the director of capital budgeting, and you must evaluate the new project. The lemon juice would be produced in an unused building adjacent to Allied's Fort Myers plane, Allied owns the building, which is fully depreciated. The purchase price of the required equiphiente is $280,000, including shipping and installation costs, and the equipment is eligjble for 190% PONYS depreciation at the time of nurcho

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
See similar textbooks
icon
Related questions
Question

Please answer part b

**Capital Budgeting and Cash Flow Estimation: Allied Food Products** **Overview:** Allied Food Products is considering expanding into the fruit juice industry with a new fresh lemon juice product. Recently, you were hired as an assistant to the director of capital budgeting to evaluate the project. The lemon juice would be produced in an unused building at Allied’s Fort Myers plant, with an initial investment cost of $280,000. This includes shipping and installation costs. Equipment is eligible for 100% depreciation at the purchase time, with inventories rising by $25,000 and accounts payable increasing by $5,000. **Project Details:** - **Lifespan:** 4 years - **Cash Inflows:** Begins 1 year after launch - **Estimated Sales:** 100,000 units annually - **Price and Costs:** Unit price is $2.00; operating costs are 60% of sales. - **Tax Rate:** 25%; WACC: 10% - **Salvage Value:** $25,000 at year-end t = 4 **Task:** Evaluate the project to recommend acceptance or rejection. Follow these steps: - **Table Creation:** 1. Year 0 – Initial investment outlays: \( \text{CAPEX} \times (1 - T) + \Delta \text{NOWC} \) 2. Estimate Unit Sales and Operating Costs 3. Calculate After-Tax Operating Income and Project Cash Flows: \( \text{EBIT} (1 - T) + \text{DEP} \) 4. Year 4 – Terminal Cash Flows and Free Cash Flow Line **Questions:** 1. **Debt Capital Structure:** - If debt is used, should cash flows account for projected interest charges? 2. **Past Expenditures:** - Should $50,000 renovations from last year be included in the analysis? 3. **Building Leases:** - Consider a $25,000 annual lease opportunity from the building; should this be included? 4. **Cannibalization:** - Would the lemon juice reduce sales from other products? Should this be accounted for? **Analysis (Assuming No Debt):** - Calculate the project’s NPV, IRR, MIRR, and Payback Period. - Evaluate if these indicators recommend acceptance. **Alternative Scenario:** - If replacing a current
Transcribed Image Text:**Capital Budgeting and Cash Flow Estimation: Allied Food Products** **Overview:** Allied Food Products is considering expanding into the fruit juice industry with a new fresh lemon juice product. Recently, you were hired as an assistant to the director of capital budgeting to evaluate the project. The lemon juice would be produced in an unused building at Allied’s Fort Myers plant, with an initial investment cost of $280,000. This includes shipping and installation costs. Equipment is eligible for 100% depreciation at the purchase time, with inventories rising by $25,000 and accounts payable increasing by $5,000. **Project Details:** - **Lifespan:** 4 years - **Cash Inflows:** Begins 1 year after launch - **Estimated Sales:** 100,000 units annually - **Price and Costs:** Unit price is $2.00; operating costs are 60% of sales. - **Tax Rate:** 25%; WACC: 10% - **Salvage Value:** $25,000 at year-end t = 4 **Task:** Evaluate the project to recommend acceptance or rejection. Follow these steps: - **Table Creation:** 1. Year 0 – Initial investment outlays: \( \text{CAPEX} \times (1 - T) + \Delta \text{NOWC} \) 2. Estimate Unit Sales and Operating Costs 3. Calculate After-Tax Operating Income and Project Cash Flows: \( \text{EBIT} (1 - T) + \text{DEP} \) 4. Year 4 – Terminal Cash Flows and Free Cash Flow Line **Questions:** 1. **Debt Capital Structure:** - If debt is used, should cash flows account for projected interest charges? 2. **Past Expenditures:** - Should $50,000 renovations from last year be included in the analysis? 3. **Building Leases:** - Consider a $25,000 annual lease opportunity from the building; should this be included? 4. **Cannibalization:** - Would the lemon juice reduce sales from other products? Should this be accounted for? **Analysis (Assuming No Debt):** - Calculate the project’s NPV, IRR, MIRR, and Payback Period. - Evaluate if these indicators recommend acceptance. **Alternative Scenario:** - If replacing a current
**Allied’s Lemon Juice Project Overview** **TABLE IC 12.1: Summary of Financial Projections (in thousands)** --- **End of Year: 0, 1, 2, 3, 4** --- ### I. Investment Outlays - **CAPEX (Capital Expenditures):** $0 - **Increase in Inventory:** $0 - **Increase in Accounts Payable:** $0 - **ΔNOWC (Change in Net Operating Working Capital):** $0 ### II. Project Operating Cash Flows - **Unit Sales (in thousands):** - Year 1: $2.00 - Year 2: $2.00 - Year 3: $2.00 - Year 4: $200.0 - **Price/Unit:** Listed values - **Total Revenues:** $0 for all years - **Operating Costs:** - Year 0: $120.0 - Years 1-3: $80.0 - **Depreciation (100% Bonus Depreciation in Year 0):** - Year 0: $120.0 - **Total Costs:** - Year 1: $20.0 - Year 2: $60.0 ### III. Project Termination Cash Flows - **Salvage Value (Taxed as Ordinary Income)** - After-tax: $98.8 - **Add Back Depreciation:** $0-$60.0 ### IV. Results - **NPV (Net Present Value):** ($230.0) - **IRR (Internal Rate of Return):** - **MIRR (Modified Internal Rate of Return):** --- ### Questions and Analysis: **e. Risk Types and Evaluation** 1. **Three Levels of Project Risk:** - Stand-alone Risk - Corporate Risk - Market Risk 2. **Most Relevant Risk Type:** Market Risk 3. **Easiest Risk Type to Measure:** Stand-alone Risk 4. **Correlation of Risk Types:** Yes, they are generally correlated. **f. Sensitivity Analysis** 1. **Definition:** Evaluation of how different values of an independent variable affect a particular dependent variable under a given set of assumptions. 2. **Application:** Analyzing changes in unit sales,
Transcribed Image Text:**Allied’s Lemon Juice Project Overview** **TABLE IC 12.1: Summary of Financial Projections (in thousands)** --- **End of Year: 0, 1, 2, 3, 4** --- ### I. Investment Outlays - **CAPEX (Capital Expenditures):** $0 - **Increase in Inventory:** $0 - **Increase in Accounts Payable:** $0 - **ΔNOWC (Change in Net Operating Working Capital):** $0 ### II. Project Operating Cash Flows - **Unit Sales (in thousands):** - Year 1: $2.00 - Year 2: $2.00 - Year 3: $2.00 - Year 4: $200.0 - **Price/Unit:** Listed values - **Total Revenues:** $0 for all years - **Operating Costs:** - Year 0: $120.0 - Years 1-3: $80.0 - **Depreciation (100% Bonus Depreciation in Year 0):** - Year 0: $120.0 - **Total Costs:** - Year 1: $20.0 - Year 2: $60.0 ### III. Project Termination Cash Flows - **Salvage Value (Taxed as Ordinary Income)** - After-tax: $98.8 - **Add Back Depreciation:** $0-$60.0 ### IV. Results - **NPV (Net Present Value):** ($230.0) - **IRR (Internal Rate of Return):** - **MIRR (Modified Internal Rate of Return):** --- ### Questions and Analysis: **e. Risk Types and Evaluation** 1. **Three Levels of Project Risk:** - Stand-alone Risk - Corporate Risk - Market Risk 2. **Most Relevant Risk Type:** Market Risk 3. **Easiest Risk Type to Measure:** Stand-alone Risk 4. **Correlation of Risk Types:** Yes, they are generally correlated. **f. Sensitivity Analysis** 1. **Definition:** Evaluation of how different values of an independent variable affect a particular dependent variable under a given set of assumptions. 2. **Application:** Analyzing changes in unit sales,
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Risk and Return
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS