The management of brewery Ipana oy is planning new strategies to increase profit. An alternative tactic for planned contract sales would be to continue the previous sales model and expand the product range. The purpose would be to launch "Napero IPA" for hipsters to marvel at, the production process of which includes a week's fermentation in a pressurized vessel that mimics the conditions of the seabed

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

The management of brewery Ipana oy is planning new strategies to increase profit. An alternative tactic for planned contract sales would be to continue the previous sales model and expand the product range.

The purpose would be to launch "Napero IPA" for hipsters to marvel at, the production process of which includes a week's fermentation in a pressurized vessel that mimics the conditions of the seabed. After fermentation, the product is filtered and further matured in a non-pressurized oak vessel to which a handful of juniper berries and a small pinch of sea salt are added.

Starting production would require a €300,000 investment in production equipment. Based on market research, the management of Ipana oy expects the sales volume to be 288,400 liters in the first year, after which the demand is expected to grow at an annual rate of 5.2%. The average selling price is expected to be significantly higher than Ipana IPA, i.e. around €3.77/liter. However, the production process requires significantly more and more expensive raw materials, the costs of which are expected to be around €2.12/liter produced. At start-up, other production-related costs are expected to be around €254,800/year.

The average return on capital requirement is 9.7% in Ipana oy at the time of making the investment decision. The stated prices do not include value added tax, corporate tax is 20%. The commitment of working capital does not need to be taken into account. The life of the production equipment is estimated to be about five years, and it is depreciated during this period, after which it can be assumed that the production equipment is unusable and worthless. In the tasks, we evaluate the profitability of the investment over a five-year period (where the investment is made in year 0, and production is running in years 1-5).

Question:Calculate the free cash flow of the first year of production.

Expert Solution
steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Theory of Constraints (TOC)
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education