I. Investment Outlays

CAPEX $**(1-T)$

lncrease in inventory

Increase in accounts payable

$\frac{?}{{?}_{\frac{?}{?}}\text{N}\text{O}\text{W}\text{C}}$

II$.$ Project Operating CashFlows

Unit sales

Price$/$unit

Total revenues

Operating costs

Depreciation: $100\%$ Bonus Depredation In Year $0$

Total costs

EBIT$($or operating income$)$

Taxes on operating income $(25\%)$

EBIT $(1-$ T$)=$ After$-$tax operating Income

Add back depreciation

EBIT $-$ T$)+$ DEP

III. Project Termination Cash Flows

Salvage value $($taxed as ordinary Income$)$

Tax on salvage value $(25\%)$

After$-$tax salvage value

$\frac{?}{{?}_{\frac{?}{?}}}$ NOWC $=$ Recovery of NOWC

Project free cash flows $=$

EBIT$(1-$ T$)+$ DEP $-$ CAPEX$-\frac{?}{{?}_{\frac{?}{?}}}$ NOWC

IV$.$ Results

$NPV=$

IRR$=$

MIRR $=$Allied Food Products is considering expanding into the fruit juice business with a new

fresh lemon juice product. Assume that you were recently hired as assistant to the director of

capital budgeting, and you must evaluate the new project. The lemon juice would be produced in

an unused building adjacent to Allied's Fort Myers plant; Allied owns the building, which is fully

depreciated. The purchase price of the required equipment is $$280,000,$ including shipping and

installation costs, and the equipment is eligible for $100\%$ bonus depreciation at the tune of

purchase.

In addition, inventories would rise by $$25,000,$ while accounts payable would increase by

$$5,000.$ All of these costs would be incurred at t $=0.$

The project is expected to operate for $4$ years, at which time it will be terminated. The

cash inflows are assumed to begin $1$ year after the project is undertaken, or at t $=1,$ and to

continue out to t $=4.$ At the end of the project's life $($t $=4),$ the equipment is expected to have a

salvage value of $$25,000.$

Unit sales are expected to total $100,000$ units per year, and the expected sales price is

$$2\mathrm{.}00$ per unit. Cash operating costs for the project are expected to total $60\%$ of dollar sales.

Allied's tax rate is $25\%.$ Tentatively, the lemon juice project is assumed to be of equal risk to

Allied's other assets.

You have been asked to evaluate the project and to make a recommendation of whether it

should be accepted or rejected. To guide you in your analysis, your boss gave you the following

set of tasks$/$questions:

a$.$ Allied has a standard form that is used in the capital budgeting process. $($See

Excel Table.$)$ Part of the table has been completed, but you n$1$ust replace the blanks with the

n$1$issing nun$1$bers. Complete the table using tile following steps:

$1.$ Fill in the blanks under Year $0$ for the initial investment outlays: CAPEX$*(1-$T$)$

and $\backslash$Delta NOWC.

$2.$ Complete the table for unit sales, sales price, total revenues, and operating costs.

$3.$ Complete the table down to after$-$tax operating income and then down to the

project's operating cash flows, EBIT $(1-$ T$)+$ DEP.

$4.$ Fill in the blanks under Year $4$ for the terminal cash flows and complete

the project free cash flow line. Discuss the recovery of net operating working capital.

What would have happened if the machinery had been sold for less than its book value?

b$.1.$ Allied uses debt in its capital structure, so some of the money used to finance the

project will be debt. Given this fact, should the projected cash flows be revised to show projected

interest charges? Explain.

$2.$ Suppose you learned that Allied had spent $$50,000$ to renovate the building last year,

expensing these costs. Should this cost be reflected in the analysis? Explain.

$3.$ Suppose you learned that Allied could lease its building to another party and earn

$$25,000$ per year. Should that fact be reflected in the analysis? If so$,$ how?

$4.$ Assume that the lemon juice project would take profitable sales away from Allied's

fresh orange juice business. Should that fact be reflected in your analysis? If so$,$ how?

c$.$ Disregard all the assumptions made in part b and assume there is no alternative use for the

building over the next $4$ years. Assume that Allied Food Products pays $8\%$ interest on its debt;

the firm's beta is $1\mathrm{.}50,$ the risk$-$free rate equals $4\mathrm{.}5\%,$ and the market risk premium is $5\%.$

Additionally, Allied Food$$s target capital structure consists of $33\mathrm{.}25\%$ debt, and $66\mathrm{.}75\%$ equity.

$1.$ Now calculate Allied$$s WACC, the project's NPV$,$ IRR, MIRR, regular paybacks, and

discounted paybacks. Do these indicators suggest that the project should be accepted?

Explain.

$2.$ If the WACC was $5\%,$ would this change your recommendation? If the WACC was

$15\%,$ would this change your recommendation? Explain your answers.