Answered step by step
Verified Expert Solution
Link Copied!
Question
1 Approved Answer

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 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 : -23,7.425,7.144,6.933,6.775,19.656
b) Answer: -10,6.095,3.866,3.865,3.917,12.009
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image
Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Healthcare Finance Modern Financial Analysis For Accelerating Biomedical Innovation

Authors: Andrew W. Lo, Shomesh E. Chaudhuri

1st Edition

0691183821, 978-0691183824

More Books

Students explore these related Finance questions