MGMT-6005 Group Assignment # 4 (Due by March 31*') Refer Chapter 12 - Integrated Case: Allied Food Products (pp. 444 447) Topic: Cash Flow Estimation Assignment Objective: Project Cash Flow Projections and Investment Analysis Project ECF = (EBIT(1-t) +Dep. - Capex - Chng. NOWC) Examine Capital investment details for the expansion project. a) Incorporate Table IC 12.1 (page 444) in an Excel worksheet and fill in the missing information. Determine NPV (@ WACC discount rate of 10%) and IRR ALLIED FOOD PRODUCTS 12-20 CAPITAL BUDGETING AND CASH FLOW ESTIMATION 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 required equipment would cost $200,000, plus an additional $40,000 for shipping and installation. 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. By a special ruling, the machinery could be depreciated under the MACRS system as 3-year property. The applicable depreciation rates are 33%, 45%, 15%, and 7%. 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 $2.00 per unit. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60% of dollar sales. Allied's tax rate is 40%, and its WACC is 10%. 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 as to whether it should be accepted or rejected. To guide you in your analysis, your boss gave you the following set of tasks/ questions: UN Allied's Lemon Juice Project fin Thousands) TABLE C 12.1 End of Year: 1. Investment Outlys Equipment cost Installation CAPEX Increase in inventory Increase in accounts payable ANOWC II. Project Operating Cash Flows Unit sales (thousands Price/unit Total revenues Operating costs excluding depreciation Depreciation Total costs EBIT for operating income) Taxes on operating income EBIT (1 - 1) = After-tax operating income Add back depreciation EBIT (1 - 1) + DEP TH. Project Termination Cash Flows Salvage value (taxed as ordinary income) Tax on salvage value After-tax salvage value ANOWC - Recovery of net operating working capital Project free cash flows = EBIT(1-T) + DEP-CAPEX - ANOWC IV. Results NPV = IRR MIRR = ($260.0)