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After seeing Snapple's success with fruit drinks, the board of directors of Modern Foods is seriously considering a proposal for a lemon juice project. You
After seeing Snapple's success with fruit drinks, the board of directors of Modern Foods is seriously
considering a proposal for a lemon juice project.
You have been recently hired as a financial analyst by Modern Foods and you report to Mahajan,
the CEO of the company. You have been entrusted with the task of evaluating the project.
The lemon juice would be produced in an unused building adjacent to the main plant of Modern
Foods. The building, owned by Modern Foods, is fully depreciated. However, it can be rented out for
an annual rental of million. The outlay on the project is expected to be million million
towartplant and machuinery and million toward gross working capital. You can assume that the
outlay will occur right in thebeginning. This means that there is no interest during the construction
period.
The proposed scheme of financing is as follows: million of equity, million of term loan,
million of working capital advance, and million oftrade credit.
The term loan is repayable in equal semiannual installments of million each. The first installment
will be due after months. The interest on the term loan will be percent.
The levels of working capital advance and trade credit will remain at million and million
respectively, till they are paid back or retired at the end of years, which is the expected life of the
project. Working capital advancewill carry an interest rate of percent.
The lemon juice project is expected to generate a revenue of million a year. The operating costs
excluding depreciation and interest are expected to be million a year.
For tax purposes, the depreciation rate on fixed assets will be percent as per the written down
value method. Assume that there is no other tax benefit.
The net salvage value of plant and machinery is expected to be million at the end of the year
Recovery of working capital, at the end of year is expected to be at book value.
The income tax rate is expected to be percent.
Mahajan wants you to estimate the cash flows from two different points of view:
a Cash flows from the point of all investors which is also called the explicit cost funds point of
view
b Cash flows from the point of equity investors.
a Answer :
b Answer:
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