PLEASE, PLEASE, PLEASE, HELP

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 a financial analyst to the director of corporate development, and you must evaluate the new project.

The lemon juice would be produced in an unused building adjacent to Allieds Fort Myers plant; Allied owns the building, which is fully depreciated. The purchase price of the required equipment is $280,000; shipping and installation costs would cost an additional $20,000. The equipment has a 10 year useful life and will be depreciated on a straight-line basis. They don't foresee buying any equipment other than this.

Allied plans to pay for this with cash and retained earnings; they don't expect to take debt out for this project. Historically, working capital has run about 5% of sales.

Unit sales are expected to total 100,000 units per year, but grow at 20%, 10%, 5% for each of the first 3 years, then reach a steady-state growth of 3%. The expected sales price is $2.00 per unit and is expected to keep up with inflation which you project to be 2.5% per year.

Cost to produce the fruit juices are expected to total 60% of dollar sales, and sales, general and operating costs, excluding depreciation, typically runs around 15.4% for the firm. Allieds tax rate is 25%, and its WACC is 10%. Tentatively, the lemon juice project is assumed to be of equal risk to Allieds other assets.

You have been asked to evaluate the project and to make a recommendation as to whether it should be accepted or rejected.

1) What is the enterprise value of Allied's fruit juice business?

2) What is the terminal value of the fruit business in year 5?

3) What is present value of the terminal value in year 5 (2025)?

4) What is the enterprise value if the WACC goes up to 12%?

5) What is the enterprise value if the WACC goes down to 8%?