QUESTION 3 1. A juice manufacturer conducted a marketing study three years ago t

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QUESTION 3 1. A juice manufacturer conducted a marketing study three years ago to determine the consumers' preferences for different type of juices including organic juices. This study was very extensive and detrimental in their decision to start a new organic juice division today. It cost them $1,000,000 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 separate from their existing assembly line for regular non-organic juices. The project has an anticipated life of 4 years. The new assembly line has a cost of $1,500,000. It will require $500,000 to customize it to the new specifications for organic juice production, and S100,000 for transportation and shipping to the company's plant The new machine falls into 5-years MACRS category (20%, 32%, 19.2%, l 1.52%, l 1.52% and 5.76%). The organic juice production will require inventories to increase by $1,000,000 at time 0; in addition, accounts payables and accruals will increase by $450,000 and $150,000 respectively The organic juice is expected to generate sales revenue of $700,000 million the first year. The revenue is expected to increase by $300,000 every year. Each year the operating costs (excluding depreciation) are expected to equal 50 percent of sales revenue. In order to do this expansion, the company will borow $3 million. The annual intrest expense on this borroving $400,000. ic juice is expected to decrease the company's existing non-organic juice sale by $350,000 per year before tax basis. The company can sell the new machine at the end of 4 years for $50,000 in the market. The company's cost of capital is 12 percent. The company's tax rate is 40 percent What is the non-operating cash flow for year 4?

Explanation / Answer

NON OPERATING CASH FLOW IN YEAR 4 Initial Cost of assembly line $1,500,000 Customization expense $500,000 Transportation and shipping $100,000 Totalcost of Depreciable Asset $2,100,000 Year                         1 2                       3 4 A MACRS depreciation rate 20% 32% 19.20% 11.52% B=A*2100000 Annual Depreciation $        420,000 $      672,000 $      403,200 $     241,920 C Accumulted depreciation $        420,000 $   1,092,000 $ 1,495,200 $ 1,737,120 D=2100000-C Bookvalue at end of year $    1,680,000 $   1,008,000 $      604,800 $     362,880 E Salvage value of the machine $50,000 F=D-E Loss on Salvage $     312,880 G=F*0.4 Tax Saving on loss $     125,152 H=E+G Net Cash flow due to Salvage $175,152 I Interest expenses ($400,000) J Return of Principal amount of loan ($3,000,000) K=H+I+J Non Operating Cash Flow in YEAR 4 ($3,224,848) ($3,224,848)

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