Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Search this course Ch 1 2 - Blueprint Problems - Cash Flow Estimation and Risk Analysis the value that is not accountea tor in a
Search this course
Ch Blueprint Problems Cash Flow Estimation and Risk Analysis
the value that is not accountea tor in a traaitional NPV analysis ana a positive option value expanas the rirm's opportunities.
Quantitative Problem: Sunshine Smoothies Company SSC manufactures and distributes smoothies. SSC is considering the development of a new line of highprotein energy smoothies. SSCs CFO has collected the following information regarding the proposed project, which is expected to last years:
The project can be operated at the company's Charleston plant, which is currently vacant.
The project will require that the company spend $ million today to purchase additional equipment. This equipment is eligible for bonus depreciation, so the equipment is fully depreciated at the time of its purchase. The company plans to use the equipment for all years of the project. At which is the project's last year of operation the equipment is expected to be sold for $ before taxes.
The project will require an increase in net operating working capital of $ at The cost of the working capital will be fully recovered at which is the project's last year of operation
Expected highprotein energy smoothie sales are as follows:
Year Sales
$
The project's annual operating costs excluding depreciation are expected to be of sales.
The company's tax rate is
The company is extremely profitable; so if any losses are incurred from the highprotein energy smoothie project they can be used to partially offset taxes paid on the company's other projects. That is assume that if there are any tax credits related to this project they can be used in the year they occur.
The project has a WACC
What is the project's expected NPV and IRR? Round your answers to decimal places. Do not round your intermediate calculations.
NPV $
IRR
Should the firm accept the project?
SSC is considering another project: the introduction of a "weight loss" smoothie. The project would require a $ million investment outlay today The aftertax cash flows would depend on whether the "weight loss" smoothie is well received by consumers. There is a chance that demand will be good, in which case the project will produce aftertax cash flows of $ million at the end of each of the next years. There is a chance that demand will be poor, in which case the aftertax cash flows will be $ million for years. The project is riskier than the firm's other projects, so it has a WACC of The firm will know if the project is successful after receiving the cash flows the first year, and after receiving the first year's cash flows it will have the option to abandon the project. If the firm decides to abandon the project the company will not receive any cash flows after but it will be able to sell the assets related to the project for $ million after taxes at Assuming the company has an option to abandon the project, what is the expected NPV of the project today? Round your answer to decimal places. Do not round your intermediate calculations. Use the values in "millions of dollars" to ascertain the answer.
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