A juice manufacturer conducted a marketing study 3 yrs ago to determine the cons

Question

A juice manufacturer conducted a marketing study 3 yrs ago to determine the consumers preferences for different types of juices including organic juices. This study was a very extensive and detrimental in their decision to start a new organic juice division today. It cost them $1,500,000 to perform this study. The company is considering introducing organic juices , the company will add a new assembly line in order to produce the organic juices seperate from their existing assembly line for regular non-organic juicces. The project has anticipated life of 4 yrs.

The new assembly line has a cost of $1,500,000 . It will require $700,000 to customize it to the new specifications fo organic juice production , and $100,000 for transportation and shipping.

The new machine falls in to the 5-yr MACRS (20%,32%,19.2%,11.52%,11.52% and 5.76%). Inventories will increase $1,100,000 at time 0; in addition accounts payable and accruals will increase by $450,000 and $150,000 respectively. The organic juice is expected to generate sales revenue of $700,000 the first year. The revenue is expected to increase by $300,000 every yr. Each year the operational cost (excluding depreciation) are expected to equal 50% of sales revenue.

In order to do this expansion , the company will borrow $3 million . The annual interest expense on borrowing is $500,000.

The organic juice is expected to decrease the company's existing non organic juice sale by $450,000 per year before tax basis. The company can sell the new machine at the end of the 4yrs for $50,000. The company's cost of capital is 12% , the company's tax rate is 40%.

1. What is the intial investment CF0

2. What is the CF1 to be used in the NPV calculations?

3.What is the non-operating cash flow for year 4?

4.What is the NPV of the project?

Explanation / Answer

1. Initial Investment

2. CF1 = -356,000

3. Non operating Cashflow

4. NPV of the project is -3,139,823

Year 0 Year 1 Year 2 Year 3 Year 4 Sales                         -            700,000    1,000,000    1,300,000    1,600,000 Operational Cost (50% of sales)          350,000       500,000       650,000       800,000 Profit before depreciation          350,000       500,000       650,000       800,000 Less: Depreciation          460,000       736,000       441,600       264,960 20% 32% 19.20% 11.52% Less: Interest          500,000       500,000       500,000       500,000 Profit/ (Loss) before tax -       610,000 -     736,000 -     291,600          35,040 Taxes @40% -       244,000 -     294,400 -     116,640          14,016 Profit/ (Loss) after tax -       366,000 -     441,600 -     174,960          21,024 Add: Depreciation          460,000       736,000       441,600       264,960 Cashflow from operating activites            94,000       294,400       266,640       285,984 Changes in Working Capital Increase in Inventories -       1,100,000 1100000 Increase in accounts Payable              450,000 -450000 Increase in accruals              150,000 -150000 Cost of Equipment -       2,300,000 Loss of sales -450000 -450000 -450000 -450000 Proceeds from sale of machine 30000 (50000*(1-0.4) Net Cashflows (A) -       2,800,000 -       356,000 -     155,600 -     183,360       365,984 DCF @ 12%(B)                           1                 0.89              0.80              0.71              0.64 (1/1.12) (0.89/1.12) (0.80/1.12) (0.71/1.12) Discounted cashflow (A*B) -       2,800,000 -       317,857 -     124,043 -     130,512       232,589 NPV -       3,139,823

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.