HOw do I complete this prblem? Exotic Food Inc., Capital Budgeting Case
CASE SUMMARY
Exotic Food Inc., a food processing company located in Herndon, VA, is considering adding a new
division to produce fresh ginger juice. Following the ongoing TV buzz about significant health benefits
derived from ginger consumption, the managers believe this drink will be a hit. However, the CEO
questions the profitability of the venture given the high costs involved. To address his concerns, you
have been asked to evaluate the project using three capital budgeting techniques (i.e., NPV, IRR and
Payback) and present your findings in a report.
CASE OVERVIEW
The main equipment required is a commercial food processor which costs $200,000. The shipping and
installation cost of the processor from China is $50,000. The processor will be depreciated under the
MACRS system using the applicable depreciation rates are 33%, 45%, 15%, and 7% respectively.
Production is estimated to last for three years, and the company will exit the market before intense
competition sets in and erodes profits. The market value of the processor is expected to be $100,000
after three years. Net working capital of $2,000 is required at the start, which will be recovered at the
end of the project. The juice will be packaged in 20 oz. containers that sell for $3.00 each. The company
expects to sell 150,000 units per year; cost of goods sold is expected to total 70% of dollar sales.
Weighted Average Cost of Capital (WACC):
Exotic Foods common stock is currently listed at $75 per share; new preferred stock sells for $80 per
share and pays a dividend of $5.00. Last year, the company paid dividends of $2.00 per share for
common stock, which is expected to grow at a constant rate of 10%. The local bank is willing to finance
the project at 10.5% annual interest. The companys marginal tax rate is 35%, and the optimum target
capital structure is:
Common equity 50%
Preferred 20%
Debt 30%
Your main task is to compute and evaluate the cash flows using capital budgeting techniques, analyze
the results, and present your recommendations whether the company should take on the project.
Questions
To help in the analysis, answer all the following questions: Present the analysis in one Excel file with the
data, computations, formulas and solutions. It is preferred that the Excel file be embedded inside the
WORD document (question 8).
1. What is the total investment amount at the start of the project (i.e., year zero cash flow)?
2. What is the depreciation amount for each year?
Create a depreciation schedule
3. What is the after-tax salvage value of the equipment?
4. What is the projected net income and Operating Cash Flows (OCF) for the three years?
Complete an income statement for each year.
5. What are the Free Cash Flows (FCF) generated from the project?
Create a projected cash flow schedule
6. What is the Weighted Average Cost of Capital (WACC)?
Compute the after-tax cost of debt
Compute the cost of common equity
Compute the cost of preferred stock
Compute the Weighted Average Cost of Capital (WACC)
7. Using a WACC of 15%, apply four capital budgeting techniques to evaluate the project, assuming
the Free Cash Flows are as follows:
Years	Free Cash Flows
0	$ (252,000.00)
1	$ 118,625.00
2	$ 127,125.00
3	$ 181,000.00
The four techniques are NPV, IRR, MIRR, and discounted Payback. Assume the reinvestment rate to be 8% for
the MIRR. Also, assume that the business will only accept projects with a payback period of two and half years
or less.