EXERCISE An important group of investors wants to determine the profitability of settling in the country with a famous brand of beverages. To establish the acceptance of the product, a market study was carried out through test markets. The results were the following: During the first year of operation, sales for knowledge of the product will reach 350,000 liters; however, at a later stage, better known as adoption (between the second and fourth year), it was determined that 280,000 liters could be sold; the fifth and sixth year 30% more (equal amount for both years) and the last two 23% more than the previous period (equal amount for both years). On the other hand, the introduction strategy was defined as selling the drink at $4.50 per liter for the first year and then increasing it by 20% for the rest of the evaluation period (the same price from year 2 to year 8). The technical study determined that each production line was capable of producing 200,000 liters per year, so when demand increases above its capacity, an additional line must be installed. To produce a liter of beverage, the following costs would be required: Supplies Unit Cost ($) Sugar 0.186 0.124 Water 0.358 Chemical elements dyes 0.255 0.180 Energy direct labor 1,156 To operate with the brand, it will be necessary to pay an annual royalty (representation right) equivalent to 5% of net sales for the first three years and 3% for the rest. The organizational study determined that for the correct development and administration of the company it will be necessary to have a structure composed of: Position Monthly gross remuneration (S) General Manager 8,000.00 Marketing manager 5,800.00 Administration and Finance Manager 6,000.00 Production manager 5,500.00 Additionally, total administration expenses have been estimated for $3,000.00 per month, a figure that will remain constant in real terms. The financial study determined that from the moment the company begins to produce until the first sale, a period of 3 months will elapse, which should be considered as working capital only insofar as variable costs are concerned, without considering royalties. For the execution of the project, it will be necessary to invest $350,000.00 in infrastructure, which will be depreciated on a straight-line basis over 20 years. It is estimated that at the end of the eighth year of operation it can be sold at 35% of its acquisition value. To set up the factory, the purchase of land valued at $50,000.00 will be required, a value that will be maintained over time. For production itself, 2 production lines will be installed, whose technology requires an investment of eighty thousand dollars each and will be depreciated on a straight-line basis over 10 years. At the end of year eight, all production lines will have a commercial value equal to 35% of their acquisition value. To finance part of the investment, it is expected to obtain a loan for the value of the infrastructure at a rate of 10% per year and payable over 5 years, the tax rate on profits is 15%. a) Prepare the Cash Flow of the Project without financing and with financing. b) Evaluate both cash flows considering a MARR of 12%. c) Determine the IRR of both flows. EXERCISE An important group of investors wants to determine the profitability of settling in the country with a famous brand of beverages. To establish the acceptance of the product, a market study was carried out through test markets. The results were the following: During the first year of operation, sales for knowledge of the product will reach 350,000 liters; however, at a later stage, better known as adoption (between the second and fourth year), it was determined that 280,000 liters could be sold; the fifth and sixth year 30% more (equal amount for both years) and the last two 23% more than the previous period (equal amount for both years). On the other hand, the introduction strategy was defined as selling the drink at $4.50 per liter for the first year and then increasing it by 20% for the rest of the evaluation period (the same price from year 2 to year 8). The technical study determined that each production line was capable of producing 200,000 liters per year, so when demand increases above its capacity, an additional line must be installed. To produce a liter of beverage, the following costs would be required: Supplies Unit Cost ($) Sugar 0.186 0.124 Water 0.358 Chemical elements dyes 0.255 0.180 Energy direct labor 1,156 To operate with the brand, it will be necessary to pay an annual royalty (representation right) equivalent to 5% of net sales for the first three years and 3% for the rest. The organizational study determined that for the correct development and administration of the company it will be necessary to have a structure composed of: Position Monthly gross remuneration (S) General Manager 8,000.00 Marketing manager 5,800.00 Administration and Finance Manager 6,000.00 Production manager 5,500.00 Additionally, total administration expenses have been estimated for $3,000.00 per month, a figure that will remain constant in real terms. The financial study determined that from the moment the company begins to produce until the first sale, a period of 3 months will elapse, which should be considered as working capital only insofar as variable costs are concerned, without considering royalties. For the execution of the project, it will be necessary to invest $350,000.00 in infrastructure, which will be depreciated on a straight-line basis over 20 years. It is estimated that at the end of the eighth year of operation it can be sold at 35% of its acquisition value. To set up the factory, the purchase of land valued at $50,000.00 will be required, a value that will be maintained over time. For production itself, 2 production lines will be installed, whose technology requires an investment of eighty thousand dollars each and will be depreciated on a straight-line basis over 10 years. At the end of year eight, all production lines will have a commercial value equal to 35% of their acquisition value. To finance part of the investment, it is expected to obtain a loan for the value of the infrastructure at a rate of 10% per year and payable over 5 years, the tax rate on profits is 15%. a) Prepare the Cash Flow of the Project without financing and with financing. b) Evaluate both cash flows considering a MARR of 12%. c) Determine the IRR of both flows