Final Case Project Suppose a beverage company is considering adding a new product line. Currently the company sells apple juice and they are considering selling a fruit drink. The fruit drink will have a selling price of $3.29 per jar. The plant has excess capacity in a fully depreciated building to process the fruit drink. The fruit drink will be discontinued in four years. The new equipment is depreciated to zero using straight line depreciation. The new fruit drink requires an increase in working capital of $35,000 and $10,000 of this increase is offset with accounts payable. Projected sales are 65,000 jars of fruit drink the first year, with a 12 percent growth for the following years. Variable costs are 26% of total revenues and fixed costs are $30,000 each year. The new equipment costs $ 54,000 and has a salvage value of $11,000. The corporate tax rate is 20 percent and the company currently has 14,000 shares of stock outstanding at a current price of $13.50. The company also has 750 bonds outstanding, with a current price of $995. The bonds pay interest annually at the coupon rate is 1.5%. The bonds have a par value of $1,000 and will mature in twenty years. Even though the company has stock outstanding it is not publicly traded. Therefore, there is no publicly available financial information. However, management believes that given the industry they are in the most reasonable comparable publicly traded company is Cott Corporation (ticker symble is COT). In addition, management believes the S&P 500 is a reasonable proxy for the market portfolio. Therefore, the cost of equity is calculated using the beta from COT and the market risk premium based on the S&P 500 annual expected rate of retum. (We calculated a monthly expected retum for the market in the retum exercise. You can simply multiply that rate by 12 for an expected annual rate on the market.) The WACC is then calculated using this information and the other information provided above. Clearly show all your calculations and sources for all parameter estimates used in the WACC. Required 1. Calculate the WACC for the company. 2. Create a partial income statement incremental cash flows from this project in the Blank Template worksheet using the tab below. 3. Enter formulas to calculate the NPV by finding the PV of the cash flows over the next four years. (You can either use the EXCEL formula PVO or use math matical formula for PV of a lump sum.) 4. Set up the EXCEL worksheet so that you are able to change the parameters in E3 to E12. Run three cases best, most likely, and worst case where the growth rate is 30%, 20%, and 5%, respectfully. 5. Create a NPV profile for the most likely case scenario. (See NPV Calculation tab below.) 6. State whether the company should accept or reject the project for each case scenario. 7. Tum in your project in the drop box. PLEASE MAKE SURE YOU CHECK THE RUBRIC SO YOU KNOW WHAT YOU WILL BE EVALUATED ON Note Cells C17 and C18 include the initial cash flows today. Collumn D through G are the operating cash flows. Cells D30, D31, and D32 include terminal cash flows. Final Case Project 1. Given the following data on proposed capital budgeting project. Economic life of project in years. Price of New Equipment Fixed Costs Salvage value of New Equipment Effect on NWC: First Year Revenues Variable Costs Marginal Tax Rate Growth Rate WACC PLEASE NOTE: You may need to change inputs provided in Collumn E at left. $10,000 $5,000 $5,000 $5,000 $5,000 50.0% 50.0% 50.0% 2.0% Spreadsheet for determining Cash Flows (in Thousands) Timeline: Year 0 II. Net Investment Outlay = Initial CFS Price (10,000) Increase in NWC III. Cash Flows from Operations Total Revenues Variable Costs Fixed Costs Depreciation Earnings Before Taxes Taxes Net Income Depreciation Net operating CFS IV. Terminal Cash Flows Salvage Value Tax on Salvage Value Return of NWC Cash Flows (10,000) Present Value of CFS (10,000) 5,000 (2,500) (5,000) (5,000) (7,500) 3,750 (3,750) 5,000 1,250 7,500 (3,750) (5,000) (5,000) (6,250) 3,125 (3,125) 5,000 1,875 11,250 (5,625) (5,000) (5,000) (4,375) 2,188 (2,188) 5,000 2,813 16,875 (8,438) (5,000) (5,000) (1,563) 781 (781) 5,000 4,219 1,250 1,225 1,875 3,640 2,813 8,111 4,219 16,064 Calculate: NPV $ 19,040.69 Create a NPV by creating a line graph of rows 9 and 10. You may want to use different discount rates in your NPV profile Creating a NPV Profile Discount Rate: 0% 2% Year CF PV(CF) PV(CF) 0 1 2 4% 6% PV(CF) PV(CF) 8% PV(CF) Cells B4 to B8 in this worksheet can link to cells C32 to G32 in the Blank Template worksheet. Find the present value of cash flows by referencing row 2 for the discount rate. You can do column C the same way as you did C33 to G33 in the Blank Template worksheet. 4 NPV Discount Rate: Rows 9 & 10 are the table that are used to crate the NPV profile graph. 0% 2% 4% 6% 8%