INTEGRATED CASE ALLIED FOOD PRODUCTS 12-23 CAPITAL BUDGETING AND CASHFLOW ESTIMATION Alied Food Products is considering expanding into the fruit juice business with a new fresh conceptuct. Asume that you were recently hired as Assistant to the director of capital budgeting and you masteraluate the new poject. The lemon juice would be produced in and building adjacent to Albed's Fort Myers plant Alied on the building, which is fully depreciated. The required apment would cost $320.000 plus an additional S40,000 for shipping and installation. In addition, mentories would rise by 625/00, while accounts payable would increase by $5.000. All of these costs would be incurred at t = 0. By a special ruling. the machinery could be depreciated under the MACRS system as 3year property. The applicable depreciation rates are 33% and The project is expected to operate free years at which time it will be terminated. The cash inflows are assumed to begin 1 year after the projects undertaken or att 1 and to continue out tot At the end of the project's like it. the equipment is expected to leave a salvage value of 525,000 Unit sales are expected to total 200.000 unts per year and the expected sales price is $2.00 per mit Cash operating costs for the projet total operating oss less depreciation are expected to total 60% of dollar ile Ahed's tax rates 80% and is WACC is 1. Tentatively, the lemon juice project is assumed to be of equal risk to Aliud's other set You have been asked to evaluate the project and to make a recommendation as to whether it should be accepted or rejected. To guide you in your your how we you the following set of tasks/ gasties Albed has a stindani kcem that is used in the capital budgeting process. (See Table IC 12.1.) Part of the table has been completed, but you must replace the blanks with the missing numbers. Complete the table using the following steps 1. Fill in the blanks under Year for the instalimestment outiers CAPEX and ANOWC 2. Complete the table for unit sies, sales pie ties, and operating costs excluding depre ciation 3. Complete the depreciation data. 4. Complete the table down to after-tax operating income and then down to the project's operating cash flow. ENT (1-1) + DEP 5. Fill in the blanks under Year 4 for the cash flows and complete the project free cash flow line. Dis the mecenery oe net operating working capital. What would have happened if the machinery had been sold for less than its book ale? b. 1 Allied se debt in its capital some of the money used to finance the project will he 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 $30.000 to move the building last year, expensing these cons Should this cost be relected in the analyse? Explain 3. Suppose you learned that Allied could building to another party and earn $25,000 per year. Should that fact be reflected in the analysis? If so, how? Assume that the lemon juice project would take profitable sales away from Albed's fresh orange juice business. Should that tactbested in your analysis? so, how? c. Dissegard all the mos made in part band some there is no alternative use for the building Over the years now calculate the pres NV, IRR, MIRR and pay back. Do these indicates suggest that the project should be accepted? Explain. d. If this project had bom a replacement on an expansion project how would the analysis have changed? Think about the changes that would have to occur in the cash flow table. 1. What the level or hypes of project risk omally considered? 2. Which type is most relevant! 3. Which type is cosest to measure? 4. Are the three types of risk generally highly comed! INTEGRATED CASE ALLIED FOOD PRODUCTS 12-23 CAPITAL BUDGETING AND CASHFLOW ESTIMATION Alied Food Products is considering expanding into the fruit juice business with a new fresh conceptuct. Asume that you were recently hired as Assistant to the director of capital budgeting and you masteraluate the new poject. The lemon juice would be produced in and building adjacent to Albed's Fort Myers plant Alied on the building, which is fully depreciated. The required apment would cost $320.000 plus an additional S40,000 for shipping and installation. In addition, mentories would rise by 625/00, while accounts payable would increase by $5.000. All of these costs would be incurred at t = 0. By a special ruling. the machinery could be depreciated under the MACRS system as 3year property. The applicable depreciation rates are 33% and The project is expected to operate free years at which time it will be terminated. The cash inflows are assumed to begin 1 year after the projects undertaken or att 1 and to continue out tot At the end of the project's like it. the equipment is expected to leave a salvage value of 525,000 Unit sales are expected to total 200.000 unts per year and the expected sales price is $2.00 per mit Cash operating costs for the projet total operating oss less depreciation are expected to total 60% of dollar ile Ahed's tax rates 80% and is WACC is 1. Tentatively, the lemon juice project is assumed to be of equal risk to Aliud's other set You have been asked to evaluate the project and to make a recommendation as to whether it should be accepted or rejected. To guide you in your your how we you the following set of tasks/ gasties Albed has a stindani kcem that is used in the capital budgeting process. (See Table IC 12.1.) Part of the table has been completed, but you must replace the blanks with the missing numbers. Complete the table using the following steps 1. Fill in the blanks under Year for the instalimestment outiers CAPEX and ANOWC 2. Complete the table for unit sies, sales pie ties, and operating costs excluding depre ciation 3. Complete the depreciation data. 4. Complete the table down to after-tax operating income and then down to the project's operating cash flow. ENT (1-1) + DEP 5. Fill in the blanks under Year 4 for the cash flows and complete the project free cash flow line. Dis the mecenery oe net operating working capital. What would have happened if the machinery had been sold for less than its book ale? b. 1 Allied se debt in its capital some of the money used to finance the project will he 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 $30.000 to move the building last year, expensing these cons Should this cost be relected in the analyse? Explain 3. Suppose you learned that Allied could building to another party and earn $25,000 per year. Should that fact be reflected in the analysis? If so, how? Assume that the lemon juice project would take profitable sales away from Albed's fresh orange juice business. Should that tactbested in your analysis? so, how? c. Dissegard all the mos made in part band some there is no alternative use for the building Over the years now calculate the pres NV, IRR, MIRR and pay back. Do these indicates suggest that the project should be accepted? Explain. d. If this project had bom a replacement on an expansion project how would the analysis have changed? Think about the changes that would have to occur in the cash flow table. 1. What the level or hypes of project risk omally considered? 2. Which type is most relevant! 3. Which type is cosest to measure? 4. Are the three types of risk generally highly comed