CougFresh is an American retailer located in Pullman, WA. The company president is John Smith, who inherited the company. When the company was founded over 30 years ago, it originally focuses on retailing beverage and organic food to more than 30 states in the US. Over the years, the company still maintains its original retail business, accounting for about 50 percent of its total revenue. Faced with stiff competition, the company also expanded into the business of manufacturing its own soft drinks. You, as a Carson College business majored, are hired by the company's finance department to evaluate a new project for the company.

As of now, CougFresh's only soft drink is named the IcyBlast (IB), and sales have been excellent. CougFresh's main competitor in the soft drink market is Coca-Cola, Inc (KO). CougFresh's IB is similar to the Coca-Colas Zero Sugar but with richer flavor. However, CougFresh wants to introduce a new energy version of the soft drink, the BurnZero (BZ), into their lineup. CougFresh spent $600,000 to develop the new BZ, which features more environmentally friendly ingredients, and is healthier than the existing IB soft drink. The company has spent a further $150,000 on a marketing study to determine the new drinks expected sales figures. CougFresh can manufacture the new drink for $1.5 per bottle in variable costs. Fixed costs for the operation are estimated to run $250,000 per year. The estimated sales volume is 500,000, 600,000, and 350,000 drinks per year for the next three years, respectively. The unit price of the new drink will be $3.5. The necessary equipment can be purchased for $350,000 and will be depreciated on a five-year MACRS schedule. It is believed the value of the equipment in three years will be $200,000.

As previously stated, CougFresh currently manufactures the IB. Production of the existing product is expecting to be terminated in two years. If CougFresh does not introduce the new BZ product, sales of the existing product will be $1,000,000, and $800,500 per year for the next two years, respectively. The price of the existing soft drink, IB is $2.5 per bottle, with variable costs of $1 each and fixed costs of $3 million per year. If CougFresh does introduce the new drink, sales of the existing one will fall by 100,000 bottles per year, and the price of the existing soft drink will have to be lowered to $2 per bottle. Net working capital for the project will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year's sales. CougFresh has a 20 percent corporate tax rate. The company has a target debt to equity ratio of 0.5 and is currently BBB- rated (according to S&P 500 ratings). The overall cost of capital of CougFresh is 10 percent. The finance department of the company has asked you to prepare a report to John, the companys CEO, and the report should answer the following questions.

QUESTIONS Required Part 1. Can you prepare the income statement and the total cash flow (CFFA) table for this new project? 2. Please use these tables to help explain to John the relevant and irrelevant cash flows of this project?