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 purchase price of the required equipment is $600,000, including shipping and installation costs, and the equipment is not eligible for 100% bonus depreciation at the time of purchase. Depreciation will be calculated using the straight-line method over the economic life of the project. In addition, inventories would rise by $15,000, accounts receivable by $25,000, while accounts payable would increase by $10,000. All of these costs would be incurred at t=0. The project is expected to operate for 5 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=5. At the end of the project's life (t=5), the equipment is expected to have a salvage value of $30,000. Unit sales are expected to total 200,000 units per year, and the expected sales price is $2.80 per unit. Cash operating costs for the project are expected to total 70% of dollar sales. Allied's tax rate is 30%, and its WACC is 9%. Tentatively, the lemon juice project is assumed to be of equal risk to Allied's other assets. Inflation of 2% will impact the sales price and operating costs, beginning in year 1. 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. INPUT DATA Project life 5 Initial Costs Equipment Depreciation/Year $600,000 Expected salvage value $120,000 Use straight-line depreciation over the life of the project Changes in NOWC AccountsreceivableInventoriesAccountspayable$25,000$15,000$10,000 Expected unit sales Price per unit 200,000 $2.80 Oper. costs (\% of sales) 70.0% Tax rate 30.0% WACC 9.0% Inflation Rate 2.0% c. Assume that you are confident about the estimates of all the variables that affect the cash flows except unit sales. If product acceptance is poor, sales will be only 150,000 units a year, while a strong consumer response will produce sales of 250,000 units. In either case, cash costs will still amount to 70% of revenues. You believe that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case). (1) What is the worst-case NPV? The best-case NPV? We used this spreadsheet model to develop these scenarios: \begin{tabular}{|c|r|r|} \hline Case & Probability & NPV \\ \hline Worst & 25% \\ \hline Base & 50% \\ \hline Best & 25% & \end{tabular} (2) Use the worst-case, most likely case (or base-case), and best-case NPVs with their probabilities of occurrence to find the project's expected NPV, standard deviation, and coefficient of variation. Expected NPV Standard deviation Coefficient of variation