Question

Quantitative Problem: Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years: • The project can be operated at the company's Charleston plant, which is currently vacant. • The project will require that the company spend $4.9 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on a straight-line basis over 5 years. Thus, the firm's annual depreciation expense is $4,900,000/5 - $980,000. The company plans to use the equipment for all 3 years of the project. Att - 3 (which is the project's last year of operation), the equipment is expected to be sold for $2,300,000 before taxes. • The project will require an increase in net operating working capital of $650,000 at t = 0. The cost of the working capital will be fully recovered att 3 (which is the project's last year of operation). • Expected high-protein energy smoothie sales are as follows: Year Sales 1 $2,400,000 27,850,000 3 3,500,000 • The project's annual operating costs (excluding depreciation) are expected to be 60% of sales. • The company's tax rate is 40%. • The company is extremely profitable; so if any losses are incurred from the high-protein 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 = 10.0% What is the project's expected NPV and IRR? Round your answers to 2 decimal places. Do not round your intermediate calculations. NPV $ IRR Should the firm accept the project? -Select-

Answer 1

	Initial Cash Flow
	Cost of Purchase	4900000
	Additional Working capital required	650000
	Initial Cash Flow	5550000
	Calculation of Net Annual Cash Flow	Year 1	Year 2	Year 3
	Sales (in $)	2400000	7850000	3500000
Less	Annual Operating Cost (60% of sales)	1440000	4710000	2100000
	Profit	960000	3140000	1400000
Less	Depreciation ($9,80,000 per year)	980000	980000	980000
	Profit Before Tax	-20000	2160000	420000
Less	Tax @ 40%	-8000	864000	168000
	Profit After Tax	-12000	1296000	252000
Add	Depreciation ($9,80,000 per year)	968000	2276000	1232000
	PV Factor at 10.0%	0.909	0.826	0.751
	Present Value of Cash Flow	879912	1879976	925232
	Terminal Cash Flow
	Selling price of equipment (after 3 years)	2300000
	Working capital Released	650000
	Terminal Cash Flow	2950000
	PV Factor	0.751
	Present value of terminal cash flow	2215450
	NPV	Aggregate of PV of cash inflows - Aggreagate of PV of cash outflows
	NPV	$350570

Initial Investment	5550000
Year	Annual Cash Innflow	PV @12	PV	PV @13	PV
1	968000	0.892857	864285.7	0.884956	764854.6
2	2276000	0.797194	1814413	0.783147	1420952
3	1232000	0.71178	876913.3	0.69305	607744.9
3 (terminal)	2950000	0.71178	2099752	0.69305	1455233
		SUM	5655364		4248785
LDR	12
P1	5655364
HDR	13
P2	4248785
Q(Initial Investment)	5550000	IRR	LDR+[(P1-Q)/(P1-P2)]*((HDR-LDR)
		IRR	12.07491