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 $380,000, plus an additional $35,000 for shipping and installation. In addition, inventories would rise by $35,000, while accounts payable would increase by $8,000. All of these costs would be incurred at t = 0. By a special ruling, the machinery could be depreciated under the MACRS system as 4-year property. The applicable depreciation rates are 35%, 30%, 25%, and 10%.

The project is expected to operate for 4 years, at which time it will be terminated. The cash inflows are assumed to begin 1 year after the project is undertaken (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 $40,000.

Unit sales are expected to total 230,000 units per year, and the expected sales price is $1.80 per unit. Cash operating costs for the project (total operating costs less depreciation) are expected to total 45% of dollar sales. Allieds tax rate is 15%, and its WACC is 10%. Tentatively, the lemon juice project is assumed to be of equal risk to Allieds other assets.

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:

Part (A)

Allied has a standard form that is used in the capital budgeting process. (See Table 1) Part of the table has been completed, but you must replace the blanks with the missing numbers (marked with x). Complete the table using the following steps:

1. Fill in the blanks under Year 0 for the initial investment outlays: Capital Expenditures (CAPEX) and change in Net Operating Working Capital (NOWC).

2. Complete the table for unit sales, sales price, total revenues, and operating costs excluding depreciation.

3. Complete the depreciation data.

4. Complete the table down to after-tax operating income and then down to the projects operating cash flows, EBIT(1 T) + DEP.

5. Fill in the blanks under Year 4 for the terminal cash flows and complete the project free cash flow line.

Part (B)

Calculate the projects NPV, IRR, MIRR, and payback. Do these indicators suggest that the project should be accepted? Explain.

Table 1: Allied's Lemon Juice Project Years 0 3 4 Investment Outlays Equipment cost Shipping andinstallation CAPEX X Increase in inventory Increase in Accounts Payable ANOWC 1.80 414,000 II. Project Operating Cash Flows Unit sales Price per unit Total revenues Operating costs (w/o deprn) Depreciation Total costs EBIT (Operating income) Taxes on operating income EBIT (1 - T) = After Tax operating income Add back depreciation EBIT (1 - T) + DEP 230,000 $ 1.80 $ 1.80 $ 1.80 $ $ 186,300 103,750 $ 331,550 $ 310,800 X $ 123,950 12,368 X X $ 105,358 145,250 103,750 $0 $ 215,333 $ 41,500 27,930 41,500 199,770 III. Project Termination Cash Flows Salvage value Tax on salvage value After-tax salvage value ANOWC = Recovery of NOWC Project Free Cash Flows = EBIT(1-T) + DEP - CAPEX - ANOWC $40,000 (6,000 34,000 $27,000 $ 260,770 $ (442,000) X X X Part (B) Calculate the project's NPV, IRR, MIRR, and payback. Do these indicators suggest that the project should be accepted? Explain