$12-17$ 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 plant; Allied

owns the building, which is fully depreciated. The required equipment would cost $$200,000,$ plus an additional

$$40,000$ for shipping and installation. In addition, inventories would rise by $$25,000,$ while accounts payable

would increase by $$5,000.$ All of these costs would be incurred at $t=0.$ By a special ruling, the machinery

could be depreciated under the MACRS system as $3-$year property. The applicable depreciation rates are $33\%,$

$45\%,15\%,$ and $7\%.$

The project is expected to operate for $4$ years, at which time it will be terminated. The cash inflows are $.$

assumed to begin $1$ year after the project is undertaken, or at $t=1,$ and to continue out to $t=4.$ At the end of

the project's life $(t=4),$ the equipment is expected to have a salvage value of $$25,000.$

Unit sales are expected to total $100,000$ units per year, and the expected sales price is $$2\mathrm{.}00$ per unit. Cash

operating costs for the project $($total operating costs less depreciation$)$ are expected to total $60\%$ of dollar sales.

Allied's tax rate is $40\%,$ and its WACC is $10\%.$ Tentatively, the lemon juice project is assumed to be of equal risk

to Allied's other assets.

You have been asked to evaluate the project and to make a recommendation as to whether it should be

accepted or rejected. To guide you in your analysis, your boss gave you the following set of tasks$/$questions:next $4$ years. Now calculate the project's NPV$,$ IRR, MIRR, and payback. Do these indicators suggest that the

project should be accepted? Explain.

d$.$ If this project had been a replacement rather than an expansion project, how would the analysis have

changed? Think about the changes that would have to occur in the cash flow table.