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Sullivan Corporation, a multiproduct corporation, a leading producer of frozen, and made-from-concentrate citrus drinks. The was founded in 2002 by Angus Sullivan, anny veteran who settled in Jacksonville: Florida, and began selling estate Smce real estate sales nere boommg: Sullivan's fortunes soared. His philosophy: which he proudly displayed behind desk, was "Buy land. They aren't makmg any more of it;" He practiced what he preached: and he Invested most of his sales commissions in citns land located in Florida's Indian River County Originally, Sullivan sold his oranges and grapefruit to wholesalers for dumbuhon to grocer,' stores: but when imce sales 'Aere expanding, he joined mth several other producers to form Sullivan Corporahow which then expanded into juice processing. Today, its Sun Joy, Flonda Gold, and Citrus Delite brands are sold throughout the United States _ Sullivan's management is currently evaluating a new product: fresh papaya jure_ The new product would cost more, but it supenor to the competing producw As Sullivan' financial analvst: you must analvze this project, along with offer potential inveshnents, and then present your findings to the company's executive committee. Production facilities for the fresh papaya jmce product would be set up in an unused section of Sullivan's main plant Relatively inexpensive used machinery With an estimated cost of only no_lld be purchased: but shipping costs to move die machiner-,' to Sullivan' plant would total and metallahon charges would add another to the total equipment cost. Fulther, Sullivan's inventories (raw materials, work-in-process, and finished goods) would have to be increased by $44,000 at the time of the initial investment The machinery has a remaining economic Ilfe of 7.00 years, and the company has obtain&d a special tax ruling that allonz it to depreciate die equipment under the NIACRS 3 00-vear claw Use the followmg depreciation schedule for your analy gig: "3 YearMARCS" Year 1: Year 2: Year3: Year 4: The machinery is expected to have a salvage value of aner 7.00 years of use _ The section of plant where die juice production would occur has been unused for several years, and consequently suffered some deterioration. Last yeu, as pan of a routine facilities improvement progam, Sullivan spent to rehabilitate that section ofthe mam plant Will Smi believes that thu outlay, which has already been paid and expensed for tax should be charged to die papaya project His contention is that ifthe rehabilitation had not taken place, the inn would have to spend die SIOO,OOO to make dae site suitable for the papaya juice project Sullivan ' s marketing department estimated that current annual demand for the papaya juice product would be 372000 cartons of ffe new juice product: at a price of SI 7.00 per carton, but SIO 00 per canon would be needed to cover fixed and variable cash operating cofr However: marketing estimates that produce demand Will mcrease by 12,000 cartons each year and that the pnce per canon will Lncrease by iOD0/o per year over the economic life of the project estimated that operating costs will increase by 3 .ODO/O per year above current operating costs In examining the sales figures, you note a short memo from Sullivan's sales manager expressmg concem that the fresh juice project would cut into the firm 's sales of frozen orange juice. Specifically , the sales manager estimated dlat orange juice concentrate sales would fall by 5 percent if fresh papaya juice 'Aere intoduced_ You then talked to both the sales and production concluded ffat die new project would probably lower the firm 's orange juice concentrate sales by $53,000.00 per year, but at mne time, it mm_lld also reduce production costs for this product by per year: all on a pre-tax basis. For simplification, no inflationary pressures are associated with the decrease in orange juice sales and reduced production costs. To evaluate the project, vou have had access to the followine mfonnation_ I. Sullivan's long-term debt consists of coupon, semi annual payment bonds with 1400 years remainmg to maturity The bonds traded last wek at a price of per S 12000 par value bond. The bonds are not callable and are rated A. 2. Nlanagement has an aversion to short-term debt, so S ullman uses such debt only to find cyclical working capital needs 3. Sullivan 's federal-plus-state tax rate 42.00%. 4. The finn 's last dividend (Do) was SI and dividends are expected to grow at about a 2.00% rate in the foreseeable f_lture. Sullivan' common stock now sells at a price of per share. 5. The cunent yield on long-term T-bonds is 7 000/0: and a prominent investment banking firm has recently estimated ffat die market nskpremzum is 6 over Treasury bonds. The firm's historical beta, as measured by several analysts who follow the stock: is O. SO. 6. The required rate of return on an average (A-rated) company' s long tenn debt is I 7. The optimal capital shucture for S ullman calls for 52000/0 long term debt and 48% equity financing You are asked to analyze the project, and then to present findings in a 'tutonal" manner to Sullivan's executive committee. The CEO Hants you to educate some of the other executives, especially the marketing and sales managers: in the theory of capital budgeting so that these executives mill have a better understanding of capital budgeting decisions. Therefore, have decided to ask and ffen answer a senes of questions as set for below. Specifics on the other two projects ffat must be analyzed are provided in Questions 7 and 8. Questions (Include your answers following each queshom) I. What is Sullivan's corporate cost of capital? Is the cost of capital the same as the cost of debt? or why not? 2. Define Incremental c ash flow, and then set forth the fie sh papaya project's operating c ash flow statement for the first year of operahom Smce the project will be financed in part by debt, should the cash flow statement Include interest expenses? Explain. 4. Should the S 100,000 that was spent to rehabilitate the plant be included in the analysis? 5. What is Sullivan's Year O investment outlay on project? the expected nonoperating cash flow when die project tennmat&d? 6. What is the project ' s estimated net cash flow stream? 7. What is the project's NPV, IR_R_ and modified IRR (I',IIRR), margm of error and payback? Should the project be undertaken?