CAPITAL BUDGETING AND CASH FLOW ESTIMATION 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 $$280,000,$ including shipping and installation costs, and the equipment is eligible for $100\%$ bonus depreciation at the time of purchase. In addition, inventories would rise by $$25,000,$ while accounts payable would increase by $$5,000.$ All of these costs would be incurred at t $=0.$

$$The project is expected to operate for $4$ years, at which time it will be terminated. The cash inflows are assumed to begin $1$ year after the project is undertaken, or at t $=1,$ and to continue out to t $=4.$ At the end of the project$$s life $($t $=4),$ the equipment is expected to have a salvage value of $$25,000.$

$$Unit sales are expected to total $100,000$ units per year, and the expected sales price is $$2\mathrm{.}00$ per unit. Cash operating costs for the project are expected to total $60\%$ of dollar sales. Allied$$s tax rate is $25\%,$ and its WACC is $10\%.$ Tentatively, the lemon juice project is assumed to be of equal risk to Allied$$s 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:

a$.$Allied has a standard form that is used in the capital budgeting process. $($See Table IC $12\mathrm{.}1.)$ Part of the table has been completed, but you must replace the blanks with the missing numbers. Complete the table using the following steps:

$1.$Fill in the blanks under Year $0$ for the initial investment outlays: CAPEX $\backslash$times $(1$ T$)$ and $$NOWC$.$

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

$3.$Complete the table down to after$-$tax operating income and then down to the project$$s operating cash flows, EBIT $(1$ T$)+$ DEP.

$4.$Fill in the blanks under Year $4$ for the terminal cash flows and complete the project free cash flow line. Discuss the recovery of net operating working capital. What would have happened if the machinery had been sold for less than its book value?

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