Reference no: EM132721584

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 $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. Machinery would be depreciated over 4 years using the straight-line method and is estimated to have a salvage value of $25,000.

• 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.

• Unit sales are expected to total 100,000 units per year and the expected sales price is $2.00 per unit. The cash operating costs for the project (total operating costs less depreciation) are expected to total 60% of sales. Allied's tax rate is 40% and its WACC is 18.50%. Tentatively, the lemon juice project is assumed to be of equal risk to Allied's other assets.
• You have asked to evaluate the project and to make recommendations as to whether it should be accepted or rejected.

Problem 1. Find the projects NINV for the project.

Problem 2. Calculate the cash net flow for years 1-3 and terminal cash flow for year 4.

Problem 3. Determine whether to accept or reject the project using:
a. NPV
b. Payback Period
c. IRR