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Hawaiian Coconut Milkshakes Inc. ( HCM ) considers the following project. They would like to expand and add a pineapple branch. The firm has paid
Hawaiian Coconut Milkshakes Inc. HCM considers the following project. They would like to expand and add a pineapple branch. The firm has paid $ to a consultant in order to find out more about the available projects and possibilities. The marketing department has done extensive consumer research on the potential demand for the new shakes. The total costs for this research was $ Based on this research, you are now considering opening up a Pineapple Juice division in the firm. The expected sales for this project are $ per year for the next years and $ for the final third year. Accepting the project would mean that you could use an empty storage unit listed on the balance sheet. This storage unit consists of a very large building, for which you paid $ in This storage unit has been fully depreciated and has a current market value of $ which is expected to remain stable over time regardless of its use. Accepting the project would also mean that your current coconut shake sales are affected. In fact, you expect to see your current total aftertax cash flows not revenues!from coconut shakes which are currently $ million per year increase immediately as of t by ie $ yearly because of the attention this project draws and they will continue at this higher level as long as the pineapple project is operational These cash flow changes are predicted to be a direct effect of this new project. Manufacturing plant and equipment for this project other than the storage unit will cost $ and will be depreciated according to a straightline method over the life of the project. The market value of the manufacturing plant and equipment at the end of the project t is $ Variable costs are projected at of sales. There are no fixed costs associated with the project. Net working capital requirements are $ at the start, and then respectively and of sales in t and t At t the NWC investments will be recovered. The required rate of return on this project is and the corporate tax rate is
What are the relevant and incremental cash flows associated with all the longterm assets
involved and categorized under Capital Spending in years t through t
What are the relevant and incremental cash flows associated with changes in Net Working
Capital in years t through t
Your CEO brings up a potentially different scenario for the project and says that the IRS
will likely apply year depreciation to the new manufacturing plant and equipment for
this project not the storage unit What is the effect on the NPV of this project given this
new scenario? Show calculations.
Also, HCM feels the start of the pineapple project is a good time to eliminate their sales
of carbonated highsugar content beverages, given a rapid marketwide decline in
demand for these sugary drinks. Current aftertax cash flows from this sector for HCM is
estimated at $ per year, which they plan to cut by an additional each year
during the next years, to then quit this sector completely. What effect does this decision
have on the NPV of the pineapple project? Explain your answer.
Finally, HCM considers the use of a $ bank loan to partially finance the pineapple
project. The loan terms include a annual interest rate and will be paid off over the
next three years. How does this financing choice affect your cash flows calculations?
Explain your answer
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