Case study expanding into the fruit juice business with a new fresh lemon juice Allied Food Products is considering expanding into the fruit juice business ntly hired as assistant to the director of capital budgeting, and you product. Assume that you were recently hired as assistant to the director of must evaluate the new project. The lemon juice w e produced in an unused building adiacent to Allied's Fort Myers plant; Allied owns the building lant: Allied owns the building, which is fully de is fully depreciated. The required equipment would cost $200,000, plus an additional $40,000 for shipping and installation. In addition, in "pping and installation. 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. By a special ruling, the machinery could be depreciated under the MACRS system as 4- year property. The applicable depreciation rates are 15,35%, 15%, and 5%. 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 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 $2.00 per unit. Cash operating costs for the project total operating costs less depreciation) are expected to total 60% of dollar sales. Allied's tax rate is 21% 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: Table 1: Allied's Lemon Juice Project Linvestment Outleys Equipment cost Shipping and installation CAPEX Increase in inventory Increase in Accounts Payable ANOWC 100,000 x 2.00 $ 2.00 $ 2.00 $ 200,000 120,000 x I. Project Operating Cash Flows Unit sales Price per unit Total revenues Operating costs (wo depm) Depreciation Total costs EBIT (Operating income) Taxes on operating income EBIT (1-T) - After Tax operating income Add back depreciation EBIT (1-T). DEP 36,000 $ 12.000 228.000 204.000 44,000 x 14.280 $ X 34,760 36,000 $0 108.000 850 $ $ 12.000 65,720 1. 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 $25,000 (5,250) 19.750 $20,000 106470 (260.000 Part I) 1. What is sensitivity analysis? 2. How would you perform a sensitivity analysis on the unit sales. salvage value and WACC for the project? Assume that each of these variables deviates from its base- case, or expected value by plus or minus 10%, 20%, and 30%. Explain how you would calculate the NPV IRR, MIRR, and payback for each case. 3. What is the primary weakness of sensitivity analysis? What are its primary advantages? Part (D) Assume that inflation is expected to average 5% over the next 4 years and that this expectation is reflected in the WACC. Moreover, inflation is expected to increase revenues and variable costs by this same 5%. Does it appear that inflation has been dealt with properly in the initial analysis to this point? If not, what should be done and how would the required adjustment affect the decision