e Allied Food Products ls Conside xProject 1.pdt 10. ABattery Manufacturer Clair ec4-FINA-3562002 BUC Project Andr x File | C/Users/haber Project 4.pdf Evolution Juice Inc. is considering expanding its existing the fruit juice business. Assume that you were recently hired as assistant to the director of capital budgeting, and you must evaluate the new The apple juice would be produced in an unused building adjacent to Evolution Juice's current plant; Evolution Juice owns the building, which is fully depreciated. The required equipment would cost 350,000, plus an additional $70,000 for shipping and installation. In addition, inventories would rise by $55,000, while accounts payable would go up by $18,000. All of these costs would be incurred today (i.e. at t 0). By a special ruling, the machinery could be depreciated under the Modified Accelerated Cost Recovery System (MACRS system) as 4-year property. The applicable depreciation rates are 33%, 45%, 15%, and 7%. 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 250,000 units per year, and the expected sales price is $2.50 per unit. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60 percent of dollar sales. Evolution Juice's tax rate is 35%, and its weighted average cost of capital is 12%. Tentatively, the apple juice project is assumed to be of equal risk to Evolution Juice'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. You are performing the analysis to answer the following questions. 1. What is the payback period of the project? If the cut-off payback period is 2 years, should we accept or reject the project? Why? What is the profitability index of the project? Should the project be accepted? Why? What is the internal rate of return (IRR) of the project? Should the project be accepted? Why? What is the net present value (NPV) of the project? Should the project be accepted? Why? 2. 3. 4. 1038 PM 4/26/2019 5 O Type here to search Ble project 4 pdf.pdf Years Investment Outlay Equipment cost Shipping and installation Increase in inventory Increase in accounts payablo Total initial investment 1S7 $55,000) $18,000 Opernting Cash Flows Unit sales Price per unit 250,000 250,000 250,000 250,000 2.50 625,000 625,00o 625,000 625,000 375,000 52.50 52.50 2.50 Total revenues Operating costs (wo depreciation) Depreciation 375,000 13B,600) 75,000 (189,000) 23b,400 186,UCO312,CO 375,000 (63,000 lotal costs Opcrating incomc Taxes an operating income Alter-lax operaig income $ 388,600 439,000 313,000 279,400 97,790 181,610 136,010 252,590 153,650 285,350 109,550 203,450 Operating cash lo Terminal Year Cash Flows Changes in net working capital Salvage value Tax on salvage value Total termination cash flow Projert Cash Flows Net cash flows 37,000 5 25,000 8,750 13,990 $140,450 457,000 $96,350 205,460 Required return (used as the discount rate) Payback period 130 PM 4/26/2019 5 O Type here to search Ble project 4 pdf.pdf | o e o file ///C:/users' haberoneDrive/Documents project%20.4%20pdf.pdf Present valur of net cash inflows Present value af cash outflows Profitability index Internal rate ol return (IRR Net present value (NPV) 130 PM 4/26/2019 5 Type here to scarch e Allied Food Products ls Conside xProject 1.pdt 10. ABattery Manufacturer Clair ec4-FINA-3562002 BUC Project Andr x File | C/Users/haber Project 4.pdf Evolution Juice Inc. is considering expanding its existing the fruit juice business. Assume that you were recently hired as assistant to the director of capital budgeting, and you must evaluate the new The apple juice would be produced in an unused building adjacent to Evolution Juice's current plant; Evolution Juice owns the building, which is fully depreciated. The required equipment would cost 350,000, plus an additional $70,000 for shipping and installation. In addition, inventories would rise by $55,000, while accounts payable would go up by $18,000. All of these costs would be incurred today (i.e. at t 0). By a special ruling, the machinery could be depreciated under the Modified Accelerated Cost Recovery System (MACRS system) as 4-year property. The applicable depreciation rates are 33%, 45%, 15%, and 7%. 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 250,000 units per year, and the expected sales price is $2.50 per unit. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60 percent of dollar sales. Evolution Juice's tax rate is 35%, and its weighted average cost of capital is 12%. Tentatively, the apple juice project is assumed to be of equal risk to Evolution Juice'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. You are performing the analysis to answer the following questions. 1. What is the payback period of the project? If the cut-off payback period is 2 years, should we accept or reject the project? Why? What is the profitability index of the project? Should the project be accepted? Why? What is the internal rate of return (IRR) of the project? Should the project be accepted? Why? What is the net present value (NPV) of the project? Should the project be accepted? Why? 2. 3. 4. 1038 PM 4/26/2019 5 O Type here to search Ble project 4 pdf.pdf Years Investment Outlay Equipment cost Shipping and installation Increase in inventory Increase in accounts payablo Total initial investment 1S7 $55,000) $18,000 Opernting Cash Flows Unit sales Price per unit 250,000 250,000 250,000 250,000 2.50 625,000 625,00o 625,000 625,000 375,000 52.50 52.50 2.50 Total revenues Operating costs (wo depreciation) Depreciation 375,000 13B,600) 75,000 (189,000) 23b,400 186,UCO312,CO 375,000 (63,000 lotal costs Opcrating incomc Taxes an operating income Alter-lax operaig income $ 388,600 439,000 313,000 279,400 97,790 181,610 136,010 252,590 153,650 285,350 109,550 203,450 Operating cash lo Terminal Year Cash Flows Changes in net working capital Salvage value Tax on salvage value Total termination cash flow Projert Cash Flows Net cash flows 37,000 5 25,000 8,750 13,990 $140,450 457,000 $96,350 205,460 Required return (used as the discount rate) Payback period 130 PM 4/26/2019 5 O Type here to search Ble project 4 pdf.pdf | o e o file ///C:/users' haberoneDrive/Documents project%20.4%20pdf.pdf Present valur of net cash inflows Present value af cash outflows Profitability index Internal rate ol return (IRR Net present value (NPV) 130 PM 4/26/2019 5 Type here to scarch