1. 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 Allieds 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. The machinery would be depreciated on a straight-line basis to a zero book value at the end of its life.

The project is expected to operate for 4 years, at which time it will 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 projects 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 $2.00 per unit. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60% of dollar sales. Allieds tax rate is 40%, and its WACC is 10%. Tentatively, the lemon juice project is assumed to be of equal risk to Allieds other assets.

Required:

a) Determine the net present value of the project.

b) Determine the payback period of the project.

c) Determine the internal rate of return of the project.

d) Do you recommend that the project be undertaken? Explain.

2. Wayne Corp. (WC) sells its stainless steel products on terms of 2/10, net 40. WC is considering granting credit to retailers with total assets as low as $500,000. Currently the lowest asset limit is $750,000. WC believes sales will increase $7 million from the new credit group but the average collection period for this new group will be 60 days versus the current average collection period of 35 days. If management estimates that 50% of the new customers will take the cash discount but 8% of the new business will be written off as bad-debt loss, should WC lower its credit standards? Assume WCs variable cost ratio is 0.75 and its required pretax rate of return on current assets investment is 12%. WC also estimates that an additional investment in inventory of $800,000 is necessary for the anticipated sales increase.