Moner Brothers, Inc. (A) Cash Flow Estimation Monet Brothen a leading California wine producer. The firm was founded in 1918 by Curle Monet, an army weieren who had spent several years in France both before and wer World War IL and who was convinced that California could produce wines that were a good or better than the best France had to eller Originally. Monet sold his wine to wholesale for distribution under their brand names, but in the early 1950s, when wine sales were expanding rapidly, he joined with his brother Raymond and several other producers to form Monet Brothen, which then bepas an agressive promotion campaign. Today, its wines are sold throughout the United States Monet's management is currently evaluating a potential new product; a light, fruity wine designed to appeal to the younger generation. The sew product California Gold, would be positioned between the various wine coolers and the traditional wines. The new product would cout more than wine coolers, but less than premium table wine, and in market research sampling at the company's Napa Valley headquarters, it was judged superior to various competing product. Jean Rect, the financial vice president, must analyse this project, along with two other potential investment, and then present her finding to the company's executive committee Production facilities for the new wine product would be set up in an unused section of Monet's main plant Relatively inexpensive, med machinery with an estimated cost of only $500,000 would be purchased, but shipping costs to move the machinery to Monet's plant would total $40,000, and installation charges would add another $60,000 to the total equipment cost Further. Monet's inventories (the new product requires some aping at the winery) would have to be increased by 520.000, and this cash Bow is mumed to occur at the time of the initial investment. The machinery has a remaining economic life of 4 years, and the company has obtained a special to ruling that allows it to depreciate the equipment under the MACRS 3-year class life. Under current tax law, the depreciation allowances are 033, 045, Q.15, and 0.07 in Yeart 1 through respectively. The machinery is expected to have a salvage value of $50,000 after 4 years of use. The section of the plant in which production would occur had not been used for several years, and consequently had sullered some deterioration. Last year, a part of a routine facilities improvement program, Monet spent $200,000 to haluate that mation of the main plaat Dan Smith, the chief content believe that the outlay, which has ready been paid and capered for purpose, should be charged to the wine projet contention is that if the rehabilitatie had not takes place, the firm would have had to spend the $200,000 to make the site suitable for the wine project. Monet's management expect to sell 200,000 bottles of the new wine product in each of the next year, and wholesale price of 54 per bottle, but 33 per bolile would be needed to cover Bed and variable cash operating cont. In cunining the sales ligures, Resce noted a short memo from Monet'l sales manager which expressed concern that the wine projel would cut into the firm's sales of wine coolen-this ype of eller is called a comedy. Specifically, the sales manager estimated that wine cooler sales would fall by 5 percent if the new wine were introduced Resce the talked to both the sales and production manager, and she concluded that the new project would probably lower the firm's wine cooler sales by 540,000 per year, but at the same time, it would also reduce production con for this product by 120,000 per year, all on a pro-tax bal. Thus, the net externally effect would be $40,000 - $20,000 - $20.000 Monet's Cederal-plus-ci in mi s 40 percent and iu overall cost of capital is 10 percent calculated follow ylilevering til cate WACC - WI-T). - 0.5(10%)(0.6) 0.5(149) -0.07. 1. Estimate Annual Cash Flows 2. Calculate NV, IPR and Payback. - 4 years (salage whe 50,00) Sale 200,000 x 34 800 000 Sale V