QUESTION 4 for 1. A juice manufacturer conducted a marketing study three years a

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QUESTION 4 for 1. A juice manufacturer conducted a marketing study three years ago to determine the consumers' preferences different type of juices including organic juices. This study was very extensive and detrimental in tih 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 $100,000 for transportation and shipping to the company's plant. The new machine falls into 5-years MACRS category (20% 32% 19.2%, 11.52%, 11.52% and 5.76%). The organic juice production will require inventories to increase by $1,000,000 at time 0; in addition, accounts payablies 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 borrow 53 million. The annual interest expense on this borrowing $400,000. The organic 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 cash flow 4 to be used in NPV calculations? $795,585 $941,920 $765,584 $836,474 $1,025,058 6.67 points

Explanation / Answer

941920

Initial cost = 1500,000+ 500,000+ 100,000 = 2100,000

Depreciation in year 4 = 11.52%*2100,000 = 241920

Year 4 OCF

Sales= 700,000+3*300,000= 1600,000

Less: Operating cost = 50% of above= 800,000

Less: Decrease in organic juice sales= 350,000

Net increment in operating income = 450000

Less: Depreciation = 241920

Net increment in Net Income= 208080

Less: Tax = 40% = 83232

Net Income after tax = 124848

Add back depreciation = 241920

OCF= 366768

Book value= =2100000-((20%+32%+19.2%+11.52%)*2100000)= 362880

Loss on sale= 362880-50000 = 312880

After tax salvage = 50000+ 312880*40%= 175152

Working capital recovery = 1000,000-450,000-150,000 = 400,000

Cash flow 4 =OCF + Working capital recovery + Salvage

= 366768+400000+ 175152

=941920

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