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 $200,000, plus an additional $40,000 for shipping and installation. In addition, inventories would rise by $25,000, while accounts payable would increase by $5,000. All of these costs would be incurred at t 0. By a special ruling, the machinery could be depreciated under the MACRS system as 4-year property. The applicable depreciation rates are 45 %, 35 %, 15 % , and 5 %. The project is expected to operate for 4 years, at which time it will be terminated. The cash inflows are assumed to begin 1 year after the project is undertaken (t= 1), and to continue out to t= 4. At the end of the project's life (t 4), the equipment is expected to have a salvage value of $25,000. Unit sales are expected to total 100,000 units per year, and the expected sales price is $2.00 per unit. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60% of dollar sales. Allied's tax rate is 21 %, and its WACC is 10%. Tentatively, the lemon juice project is assumed to be of equal risk to Allied's other assets. M N Part A Years 0 1 2 3 L Investment Outlays Equipment Cost Shipping and Instalation CAPEX 4 45% 36% 15% 55 (200,000 00 (40,000 00) (240.000.00 S Increase in inventorys Increase in Accounts Payable Change in NWC (25.000 00 5,000 00 (20,000.00) B Project Operating Cash Flows Unt Sales Price per Ut Total Revenues 100.000 00 2.00 100,000 00 100,000.00 100.000 00 2.00 $ 200 000 00 $ 120 000.00 $ 200,000 00 120,000 00 200 S 200 000 00 S 120 000 00 2 00 $ 200 000 00 Operating Costs (wio depen) S 120,000 00 Depreciation Depreciation Total Costs 108.000 00S 84.000 00 228.000 00 S 204.000 00 $ 156.000 00 $ 132.000 00 (28.000 00 36.000 00 S 12.000 00 EBIT (Opearting income) Si (4.000 00)S 44.000 00 68.000 00 IV. Operating income Taxes on operating income (5.880 00 S (22,120 00 108.000 00 S 85 880 00 S (840 00 a 54.000.00 80 840 00 9.240.00 S 34.760 00 S 63.72O 00 36.000 00 1 S 14,280 00 Proft after taxes Add back depreciahon Profit after taxes Depn S S 12.000 00 70.760 00 S 65.720 00 V. Project Termination Cash Flows Salvage Value Tax on savage value After Tax salvage value Recover of NWC 25,000 00 (5.250.00) 19.750 00 20000 00 Project Free Cash Flows (260,000 00 120.590.00 S 110.510.00 125,630.00 105,470.00 IN RED IT SAYS (4,840)**** 1. Calculate the project's NPV, IRR, MIRR, and payback. Do these indicators suggest that the project should be accepted? Explain 2. How would you perform a sensitivity analysis on the unit sales, salvage value, and WACC for the project? Assume that each of these variables deviates from its base-case, or expected value by plus or minus 10%, 20 % , and 30 %. Explain how you would calculate the NPV, IRR, MIRR, and payback for each case. 3. What is the primary weakness of sensitivity analysis? What are its primary advantages? vestment Outlays Equipment Cost Shipping and Installation CAPEX Years 0 2 3 4 45% 35 % 15% 5% (200,000 00) (40,000 00) (240,000.00) Increase in Inventory (26,000 00) S Increase in Accounts Payable S 5,000 00 Change in NWC (20.000.00) II. Project Operating Cash Flows Unit Sales 100,000 00 2.00 100.000 00 100,000 00 100,000 00 $ $ Price per Unit Total Revenues Operating Costs (w/o depm) 2.00 $ 2 00 2.00 200,000 00 S 200,000 00 $ 200,000 00 S 200,000 00 120,000 00 $ 120,000 00 $ 120,000 00 $ 120,000 00 $ III. Depreciation Data Depreciation Total Costs 84 000 00 S 36,000.00 S 12,000.00 156,000 00 132,000 00 44,000 00 68,000.00 108,000 00 S 228,000 00 $ 204.000 00 $ $ EBIT (Opearting Income) (28,000 00 (4,000 00) S $ IV.Operating Income Taxes on operating income Profit after taxes Add back depreciation Profit after taxes + Depn 9.240.00 $ 14,280.00 (5,880.00 S $ (840.00 S (22.120 00) S uoS 34,760 00 S 53.720 00 108,000 00 $ 84,000 00 36,000.00 $ 12,000 00 85,880 00 S 80.840 00 $ 70,760 00 S 65,720 00 S $ $ V. Project Termination Cash Flows Salvage Value Tax on salvage value After Tax salvage value $ 25,000 00 S (5,250.00) $ 19,750 00 $ 20,000 00 Recover of NWC 125,630.00 120,590.00 $ 110,510.00 $ 105,470.00 (260,000.00)| $ Project Free Cash Flows