Finance

RUNNING HEAD : CAPITAL BUDGETING AND CASH FLOW ESTIMATION : ALLIED FOOD PRODUCTS

ALLIED FOOD PRODUCTS

CAPITAL BUDGETING AND CASH FLOW ESTIMATION

[The name of the writer appears here]

[The name of the institution appears here] Allied Food Products

Capital Budgeting and Cash Flow Estimation

ALLIED FOOD CASE

AFTER SEEING SNAPPLE 'S SUCCESS WITH NONCOLA SOFT DRINKS AND LEARNING OF COKE 'S

AND PEPSI 'S INTEREST , ALLIED FOOD PRODUCTS HAS DECIDED TO CONSIDER AN EXPANSION

OF ITS OWN IN THE FRUIT JUICE BUSINESS . THE PRODUCT BEING CONSIDERED IS

FRESH

LEMON JUICE . 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 200 ,000 , PLUS AN ADDITIONAL 40 ,000 FOR SHIPPING AND INSTALLATION . IN ADDITION INVENTORIES WOULD RISE BY 25 ,000 , WHILE ACCOUNTS PAYABLE WOULD GO UP 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 3-YEAR PROPERTY . THE APPLICABLE DEPRECIATION RATES ARE 33 PERCENT , 45 PERCENT , 15 PERCENT , AND 7 PERCENT

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 , OR AT 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 SALES PRICE IS 2 .00 PER CAN . CASH OPERATING COSTS FOR THE PROJECT (PERCENT OF DOLLAR SALES . ALLIED 'S TAX RATE IS 40 PERCENT , AND ITS WEIGHTED AVERAGE COST OF CAPITAL IS 10 PERCENT . TENTATIVELY , THE LEMON JUICE PROJECT IS ASSUMED TO BE OF EQUAL RISK TO ALLIED 'S OTHER ASSETS

YOU HAVE BEEN ASKED TO EVALUATE THE PROJECT AND TO MAKE A RECOMMENDATION AS TO WHETHER IT SHOULD BE ACCEPTED OR REJECTED . TO GUIDE YOU IN YOUR ANALYSIS , YOUR BOSS GAVE YOU THE FOLLOWING SET OF QUESTIONS

TABLE IC11-1 . ALLIED 'S LEMON JUICE PROJECT END OF YEAR : 0 1 2 3 4

I . INVESTMENT OUTLAY

EQUIPMENT COST

INSTALLATION

INCREASE IN INVENTORY

INCREASE IN ACCOUNTS PAYABLE II . OPERATING CASH FLOWS

UNIT SALES (THOUSANDS ) 100

PRICE /UNIT 2 .00 2 .00 OPERATING COSTS

EXCLUDING DEPRECIATION 120 .0

DEPRECIATION 36 .0 16 .8 OPERATING INCOME BEFORE TAXES 44 .0

TAXES ON OPERATING INCOME 0 .3 25 .3

OPERATING INCOME AFTER TAXES 26 .4

DEPRECIATION 79 .2 36 .0

OPERATING CASH FLOW 0 .0 79 .7 54 .7

III . TERMINAL YEAR CASH FLOWS

RETURN OF NET OPERATING WORKING CAPITAL

SALVAGE VALUE

TAX ON SALVAGE VALUE IV . NET CASH FLOWS

NET CASH FLOW ADVANCE \l1 260 .0 89 .7

V . RESULTS

NPV

IRR

MIRR

PAYBACK

A . DRAW A TIME LINE THAT SHOWS WHEN THE NET CASH INFLOWS AND...