Monet Brothers, Inc. (A) Cash Flow Estimation Monet Brothers ts a leading California wine producer. The firm was founded in 1948 by Charles Monet, an army veteran who had spent several years in France both before and after World War II, and who was convinced that California could produce wines that were as good as or better than the best France had to offer. Originally, Monet sold his wine to wholesalers 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 Brothers, which then began an aggressive 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 new product, California-Gold, would be positioned between the various wine coolers and the traditional wines. The new product would cost more than wine coolers, but less than premium table wins, and in market research samplings at the company's Napa Valley headquarters, it was judged superior to various competing products. Jean Resce, the financial vice president, must analyze this project, along with two other potential investments, and then present her findings 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, used machinery with an estimated cost of only 5500,000 would be purchased, but shipping costs to move the machinery to Monet's plant would total $40,000, and installation cbarges would add another 560,000 to the total equipment Cost Further, Monet's inventories (the new product requires some aging at the winery) would have to be increased by $20,000, and this cash flow is assumed 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 tax ruling that allows it to depreciate the equipment under the MACRS 3-year class life. Under current tax law, the depreciation allowances are 0.33, 0.45, 0.15, and 0.07 in Years 1 through 4, respectively. The machinery is expected to have a salvage value of 550,000 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 suffered some deterioration. Last year, as part of a routine facilities improvement program, Monet spent $200,000 to e project to cover and rehabilitate that section of the main plant. Dan Smith, the chief accountant, believes that this outlay, which has already been paid and expensed for tax purposes, should be charged to the wine project. His contention is a is that the rehabilitation bad bot takes place, the firm would have had to spend the to make the site suitable for the wine Muset's management expects to sell 200,000 bottles of the new wine product in each of the next 4 years, at a wholesale price of 54 per bottle, but $3 per bottle examining the sales figures, Rescendied a short memo from Monet's sales manager coolen-this type of elect is called concern that the wine project would cut into the firm's sales of wine in temality. Specifically, the sales manager estimated that wine cooler sales would fall by 5 percentil the new wine were introduced Resce then talled to both the sales and production managers, and she concluded that the new project would probably lower the firm's fies by $40,000 per year, but at the same time, it would also reduce for this product by $20,000 per year, all on a pre-wax basis. Thus, the net externally effect would be $10,000+ $20.000 - $20,000. Monet's federal-plus-state tax rate is 40 percent, and its overall cost of capital is 10 percent, calculated as follows: espresso WACC - K.(1 - 1) +w. - 0.5(10%)(0.6) 0.5(14%) - 50.0%. 1. Estimate Annual Cash Flows 2. Calculate NPV, IRR and Payback Monet Brothers, Inc. (A) Cash Flow Estimation Monet Brothers ts a leading California wine producer. The firm was founded in 1948 by Charles Monet, an army veteran who had spent several years in France both before and after World War II, and who was convinced that California could produce wines that were as good as or better than the best France had to offer. Originally, Monet sold his wine to wholesalers 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 Brothers, which then began an aggressive 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 new product, California-Gold, would be positioned between the various wine coolers and the traditional wines. The new product would cost more than wine coolers, but less than premium table wins, and in market research samplings at the company's Napa Valley headquarters, it was judged superior to various competing products. Jean Resce, the financial vice president, must analyze this project, along with two other potential investments, and then present her findings 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, used machinery with an estimated cost of only 5500,000 would be purchased, but shipping costs to move the machinery to Monet's plant would total $40,000, and installation cbarges would add another 560,000 to the total equipment Cost Further, Monet's inventories (the new product requires some aging at the winery) would have to be increased by $20,000, and this cash flow is assumed 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 tax ruling that allows it to depreciate the equipment under the MACRS 3-year class life. Under current tax law, the depreciation allowances are 0.33, 0.45, 0.15, and 0.07 in Years 1 through 4, respectively. The machinery is expected to have a salvage value of 550,000 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 suffered some deterioration. Last year, as part of a routine facilities improvement program, Monet spent $200,000 to e project to cover and rehabilitate that section of the main plant. Dan Smith, the chief accountant, believes that this outlay, which has already been paid and expensed for tax purposes, should be charged to the wine project. His contention is a is that the rehabilitation bad bot takes place, the firm would have had to spend the to make the site suitable for the wine Muset's management expects to sell 200,000 bottles of the new wine product in each of the next 4 years, at a wholesale price of 54 per bottle, but $3 per bottle examining the sales figures, Rescendied a short memo from Monet's sales manager coolen-this type of elect is called concern that the wine project would cut into the firm's sales of wine in temality. Specifically, the sales manager estimated that wine cooler sales would fall by 5 percentil the new wine were introduced Resce then talled to both the sales and production managers, and she concluded that the new project would probably lower the firm's fies by $40,000 per year, but at the same time, it would also reduce for this product by $20,000 per year, all on a pre-wax basis. Thus, the net externally effect would be $10,000+ $20.000 - $20,000. Monet's federal-plus-state tax rate is 40 percent, and its overall cost of capital is 10 percent, calculated as follows: espresso WACC - K.(1 - 1) +w. - 0.5(10%)(0.6) 0.5(14%) - 50.0%. 1. Estimate Annual Cash Flows 2. Calculate NPV, IRR and Payback