Question

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Please first analyze cash flows for Project L. Then calculate NPV and IRR, and make your capital budgeting decision. To study the health-food market, Allied has done a market research in 2019. This market research costed Allied $10k. The research confirmed Allied's previous belief that the health-food industry has a huge potential and will be a highly profitable industry. Therefore, Allied is considering a new expansion project. Proiect L, which is a new health-food product that Allied is considering introducing to the health-food market. Below is the information Allied has collected for Project L: Allied currently owns a food processing equipment, with a market value of $1,000k, and will invest this equipment into Project L. In addition, Project L will require Allied to purchase $4,000 of equipment in 2019, i.e. t = 0. Inventory will increase by $600k and accounts payable will rise by $100k. All other working capital components will stay the same. Project I will last for 4 years. Allied forecasts the following sales: 2,000k units in 2020; 4,000k units in 2021; 4,000k units in 2022; and 4,000k units in 2023. Each unit will sell for $5. The fixed cost (except depreciation) of producing the product is $4,000k each year, and the variable cost of producing each unit will be $3 each year. Allied will use accelerated depreciation. The depreciation schedule will be given below. When the project is completed in 2023, Allied expects that it will be able to salvage the equipment for $100k (taxed as ordinary operating income) and that it will fully recover its initial investment into NOWC. The estimated tax rate is 40%. Based on the perceived risk, the project's WACC is estimated to be 10% Please fill in the blank below, analyzing cash flows for Project L Enter all dollars (except for sales price and variable cost per unit) and unit sales in thousands. Initial investment, CF : Year 2020 2021 2022 Period 1 2 3 Investment Outlays at Time = 0 2019 2023 4 CAPEX ANOWC - Additional net operating working capital needed

Answer 1

NOTE- All the amount is in '000 (i.e 'k') Initial investment CFO Year 2019 Period Market value of food processing unit+Additional equipment cost Сарех $1,000+$4,000 $5,000 Change in NWOC(net operating working capital) Increase in inventory-increase in payables $600-$100 $500 Research expenditure is sunk cost and hence not considered.lt has no relevance in decision now. Depreciation schedule Accelerated Period Dep 1 2 4 Cost (CAPEX) $5,000 Rate 33% 45% 15% 7% Depreciation $1,650.00 $2,250.00 $750.00 $350.00

Operating Cashflow Year 2020 2021 2022 2023 Period 1 2 3 4 2000 4000 Unit sales 4000 4000 S5 $5 $5 $5 sales price Sales revenue(a*b) $10,000 $20,000 $20,000 $20,000 S3 S3 $3 $3 d) Var cost per unit Var cost (d a) $6,000 $12,000 $12,000 $12,000 Fixed operating cost except depreciation depreciation (from $4,000 $4,000 $4,000 $4,000 $1,650.00 $2,250.00 S750.00 $350.00 g) above) Total operating cost(e+f+g) EBIT (operating income) $11,650.00 $18,250.00 $16,750.00 $16,350.00 h) ($1,650.00) ($660.00) $1,750.00 $700.00 $3,250.00 $3,650.00 $1,300.00 $1,460.00 (c-h) Taxes (i 40 % ) |j) After tax operating income (i-j) ($990.00) $1,050.00 $1,950.00 $2,190.00 k) Add back depreciation $1,650.00 $2,250.00 $750.00 $350.00 EBIT(1-t) depreciation |m) $660.00 $3,300.00 $2,700.00 $2,540.00 (k+I) Terminal cashflow 2023 Year Period $100 Salvage value Тax (a*40%) After tax salavage (a-b) 40 $60 d) Recovery of net $500 operating working Total terminal cash flow $560 e) (c+d)

Taking all the 3 parts together Year 2019 2020 2021 2022 2023 Total Period 0 2. 4 Investment at Y-0 ($5000)+($500 Capex+change in NWOC) (S5,500) $660.00 $3,300.00 $2,700.00 $2,540.00 Operating cashlow $560 Terminal cashflow At t-4 (after tax salvage value+working capital) Project Free cashflow EBIT(1-t)+dep] ($5,500) $660.00 $3,300.00 $2,700.00 $3,100.00 (CAPEX+change in Present value factor@ 10 0.9091 0.8264 0.7513 0.6830 Present value (free cf PV ($5,500) $600 $2,727 $2,029 $2,117 $1,973 NPV Sum of all cashflow $1,973 Since project NPV is positive,we should accept the project IRR Rate at which Project free cashflow equlas initial investment 0.12 or 12% IRR can be calculated using financial calculator or via EXCEL There may be slight difference due to decimal places,Please do not downvote on that basis Please upvote the answer. If you have any doubt,please ask