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 $1$ million. The outlay on the project is expected to be $25$ million $-15$ million

towartplant and machuinery and $10$ million toward gross working capital. You can assume that the

outlay will occur right in the$-$beginning. This means that there is no interest during the construction

period.

The proposed scheme of financing is as follows: $0$ million of equity, $8$ million of term loan,

$5$ million of working capital advance, and $2$ million of$.$trade credit.

The term loan is repayable in $8$ equal semi$-$annual installments of $1$ million each. The first installment

will be due after $18$ months. The interest on the term loan will be $15$ percent.

The levels of working capital advance and trade credit will remain at $5$ million and $2$ million

respectively, till they are paid back or retired at the end of $5$ years, which is the expected life of the

project. Working capital advance$-$will carry an interest rate of $14$ percent.

The lemon juice project is expected to generate a revenue of $30$ million a year. The operating costs

$($excluding depreciation and interest$)$ are expected to be $20$ million a year.

For tax purposes, the depreciation rate on fixed assets will be $25$ 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 $5$ million at the end of the year $5.$

Recovery of working capital, at the end of year $5,$ is expected to be at book value.

The income tax rate is expected to be $30$ 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 : $-23,7\mathrm{.}425,7\mathrm{.}144,6\mathrm{.}933,6\mathrm{.}775,19\mathrm{.}656$

b$)$ Answer: $-10,6\mathrm{.}095,3\mathrm{.}866,3\mathrm{.}865,3\mathrm{.}917,12\mathrm{.}009$