Florida Citrus is a leading producer of fresh, frozen, and made from concentrate orange juice. The firm was founded in 1926 by Bill Taylor, a navy veteran who settled in Miami after WWI and began selling real estate. Since real estate sales were booming, Taylors fortunes soared. His investment philosophy which he proudly displayed behind his desk was Buy Land. They arent making any more of it. He practiced what he preached but instead of investing in residential property, which he knew was grossly overvalued he invested most of his sales commissions in citrus land located in Indian River County. Taylor sold his oranges, lemons and grapefruit to wholesalers for distribution to grocery stores.

Florida Citrus management is currently evaluating a new product, fresh lemonade. The new product would cost more but is far superior to the competing frozen lemonade products in the overall domestic and international market that are made from reconstituted lemon juice.

Production facilities for the fresh lemonade product would be set up in an unused section of the firms main plant. Relatively inexpensive machinery with an estimated cost of only $500,000 would be purchased; but the shipping costs of $20,000 and installation charges of $50,000 would be additional costs of the equipment. Inventories would have to be increased by $12,500 at the time of the initial investment, t = 0. Additional inventories for the subsequent years (i.e., years 2, 3 and 4) is expected to be 5% of expected incremental sales or revenue.

The machinery has a remaining economic life of 4 years and the company has obtained a special tax ruling that allows it to depreciate the equipment under the MACRS 3-year class of 33.33%, 44.45%, 14.81 and 7.41% in year 1-4 respectively. The machinery is expected to have a salvage (or estimated market) value of $100,000 after 4 years of use.

The section of the main plant where lemonade production would occur has been unused for several years and consequently has suffered some deterioration. Last year, as part of a routine facility improvement program, the firm spent $100,000 to rehabilitate that section of the main plant. Florida Citrus recently received an offer from another citrus producer who expressed an interest in leasing the proposed production site for this project for $25,000 per year.

The Food and Business industry analysts expect all lemonade juice producers to produce 7.5 million fresh lemonade juice products this year (i.e., t = 0) and production is expected to grow at a 2.5 percent per year thereafter. Florida Citrus management expects to capture 9 percent of the 16-ounce cartons of the new lemonade product in each of the next 4 years and the current (i.e., year 0) price is $2 per carton; and $1.50 per carton is the current (i.e., year 0) cost needed to cover the variable cash operating costs. In addition, the Florida Citrus project will incur $0.3 million in marketing and general administration costs (including salaries, and other sundry expenses) in the first year (i.e., t=1) based on estimates from operations. This cost is expected to increase at the 3 percent inflation rate in the subsequent years.

It is expected that price per 16oz carton of juice will increase at a rate of 5% per year while the operating costs will increase at a 3% rate per year. The firms sales department noted that the new lemonade project would cut into the firms sales of frozen lemonade. Specifically, the sales manager estimated that the lemonade concentrate sales would fall by 5% if fresh lemonade were introduced and estimates from both the sales and production departments concluded that the new product would probably lower the firms lemonade concentrate sales by $40,000 per year. At the same time, the production costs of lemonade concentrate would reduce by $20,000 per year, all on a pre-tax basis.

Given the firms tax rate as 40% and its overall cost of capital as 10%, you have been approached by the CFO of the company with a request to analyze and critically evaluate the project. Estimate its potential profitability of this proposed investment (i.e., NPV, IRR, MIRR etc.) and submit your recommendations. Also perform a break-even analysis to determine the number of 16oz cartons that would be sold per year to break-even. Should Florida Citrus proceed with the project?