Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Problem #1 Allied Food Products is considering expanding into the fruit juice business with a new fresh lemon juice product. Assume that you were recently
Problem #1 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 $123,000 plus an additional $15,000 for shipping and installation. In addition, inventories would rise by $5,000, while accounts payable would increase by $3,000. All of these costs would be incurred at t 0. The machinery will be depreciated under the MACRS system as a three year property.. The applicable depreciation rates are 33%, 45% 15%, and 7%.The project is expected to operate for 3 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 3. At the end of the project's life (t 3), the equipment is expected to have a market value of $25,000. Unit sales are expected to total 20,000 units per year, and the expected sales price is $5.00 per unit. Cost of goods sold is expected to total 20% of dollar sales. Allied's tax rate is 30%, and its WACC is 10%. You have been asked to evaluate the project and to make a recommendation as to whether it should be accepted or rejected. Your boss will like you to use the NPV, IRR and payback techniques to evaluate this project. To guide you in your analysis, your boss gave you the following set of questions a. Compute year 0 cash flow b. Show the depreciation schedule c. Compute the book value for each year
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started