ARtline -AP-koud QUESTION A juice manufacturer conducted a marketing study three
ID: 2658362 • Letter: A
Question
ARtline -AP-koud QUESTION A juice manufacturer conducted a marketing study three years ago to determine the consumers' preferences for different type of juices including organic juices. This study was very extensive and detrimental in their decision to start a new organic juice division today. It cost them $1,000,000 to perform this study The company is considering introducing organic juices. The company will add a new assembly line in order to produce the organic juices separate from their existing assembly line for regular non-organic juices. The project has an anticipated life of 4 years. The new assembly line has a cost of S1,500,000, It will require $500,000 to customize it to the new specifications for organic juice production, and S100,000 for transportation and shipping to the company's plant. The new machine falls into 5-years MACRS category (20%, 32%, 19 2% i i 52% i i 52% and 5.76%). The organic juice production will time 0; in addition, accounts requirbinventories o increase bys 1,000,000 accruals will increase by $450,000 and $150,000 respectively The organic juice is expected to generate sales revenue of $700,000 million the first year. The revenue is expected to increase by $300,000 every year. Each year the operating costs (excluding depreciation) are expected to equal 50 percent of sales revenue. In order to do this expansion, the company will borrow $3 million. The annual interest expense on this borrowing $400,000. The organic juice is expected to decrease the company's existing non-organic juice sale by $350,000 per year before tax basis. The company can sell the new machine at the end of 4 years for $50,000 in the market. The company's cost of capital is 12 percent. The company's tax rate is 40 percent What is the NPV of the project? $1,222,443.29 $512,745.36 $771,991.67 -$243,547.52 $1,580,863.28 1,510,000 aon 6.67 points CAPEX AN (400,000) 100,00 nttal Inv art 500Explanation / Answer
Tax rate 40% Year-0 Year-1 Year-2 Year-3 Year-4 Sale 700,000 1,000,000 1,300,000 1,600,000 Less: Operating Cost-50% 350,000 500,000 650,000 800,000 Contribution 350,000 500,000 650,000 800,000 Less: Fixed Cost - - - - Less: Depreciation as per table given below 420,000 672,000 403,200 241,920 Profit before tax (70,000) (172,000) 246,800 558,080 Tax (28,000) (68,800) 98,720 223,232 Profit After Tax (42,000) (103,200) 148,080 334,848 Add Depreciation 420,000 672,000 403,200 241,920 Cash Profit After tax 378,000 568,800 551,280 576,768 Contribution lost- 350000*50%*60% (210,000) (210,000) (210,000) (210,000) Net Cash flow 168,000 358,800 341,280 366,768 Cost of macine 2,100,000 Depreciation 1,737,120 WDV 362,880 Sale price 50,000 Profit/(Loss) (312,880) Tax (125,152) Sale price after tax 175,152 Depreciation Year-1 Year-2 Year-3 Year-4 Total Cost 2,100,000 2,100,000 2,100,000 2,100,000 Dep Rate 20.00% 32.00% 19.20% 11.52% Deprecaition 420,000 672,000 403,200 241,920 1,737,120 Calculation of NPV 12.00% Year Captial Working captial Operating cash Annual Cash flow PV factor Present values 0 (2,100,000) (400,000) (2,500,000) 1.000 (2,500,000) 1 168,000 168,000 0.893 150,000 2 358,800 358,800 0.797 286,033 3 341,280 341,280 0.712 242,916 4 175,152 400,000 366,768 941,920 0.636 598,607 Net Present Value (1,222,443) So option A is correct