Green Lemon firm is one of the biggest producers of Lemon Juice. The management of the company is in the process of evaluating a new product, which called Stevia Lemon Juice. They spent $25,000 in marketing research and they found that despite the fact that a big portion of the consumers like the lemon juice, they do not want to consume it because of its high sugar concentration. You are working in the Finance Department and you are asked to analyze this project, along with one other potential investment, and then present these findings to the companys executive committee.

The production facilities for the new juice would be set up in a section of the firms main plant which is unused. Used machinery with an estimated cost of $500,000 would be purchased. Shipping cost is $20,000, and installation cost would add another $50,000 to the total equipment cost. Moreover, inventories (raw materials, work-in-process, and finished goods) would have to be increased by $13,000 at the time of the initial investment. The machinery has a remaining economic life of 4 years, and the company uses straight line depreciation method. The machinery is expected to have a salvage value of $100,000 after 4 years use.

The unused section of the main plant was abandoned for many years. The company spent for its renovation $120,000. The management of the company forecasts to sell 450,000 1.5lt. cartons of the Stevia lemon Juice in each of the next 4 years, at a price of $2.5 per carton, of which $1.6 per carton would be needed to cover fixed and variable cash operating costs. Since most of the costs are variable, the fixed and variable cost categories have been combined. Also note that operating cost charges are a function of the number of units sold rather than unit price, so unit price changes have no effect on operating costs.

In examining the sales figures, you noted a short memo from the marketing manager expressing his concerns that the new product would cannibalize the sales of the existing apple juice by 5%. After investing this matter further you found that the new project would probably lower the regular juice sales by $50,000 per year, which have a cost of $21,000 per year, all on a pre-tax basis. The company has a pretax cost of debt 10% and a cost of equity 30% while the capital structure of the firm consists of 40% debt and 60% common equity. The tax rate of the firm is 40%. The beta of the company is 1.10.

Please, give your answers to the following questions:

6. Considering the following mutually exclusive projects:

YEAR PROJECT 1 PROJECT 2

(Initial Investment and OCF) (Initial Investment and OCF)

0 ($100,000) ($100,000)

1 $60,000 $35,000

What is each projects NPV, payback period, discounted payback period, IRR and profitability index? Are you going to choose any of these projects instead of the Stevia lemon Juice project? Explain and clarify tour answer giving the appropriate theory and evidence.

7. Another project involves the purchase of used trucks with a life of 3 years. The trucks will be obsolete at the end of the 3rd year. However, if the trucks were taken out of service prior to the end of 3 years, they would have positive salvage values. Here are the estimated net cash flows for each truck:

YEAR Initial Investment and OCF End of year Salvage Value

0 ($40,000) $40,000

1 $17,000 $25,000

2 $16,000 $16,000

3 $14,000 $0

Find the NPV and IRR of the investment for each year.

8. In order to complete your analysis, you have to provide your final position for the investment plans of Green Lemon and explain if those plans would help the company to achieve its strategic goals.

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