Question

TEGRATED CASE ALLIED FOOD PRODUCTS CAPITAL BUDGETING AND CASH FLOW ESTIMATION 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 $10,000 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. By a special ruling, the machinery could be depreciated under the MACRS system as 3-year property. The applicable depreciation rates are 33%, 45%, 15%, and 7% 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 att1and to continue out tot 4. At the end of the project's life 4), the equipment is expected to have a salvage value of $25.000, Unit sales are expected to total 100,000 units per year, and the expected sales price is $2.00 per unit. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60% of dollar sales. Allied's tax rate is 40%, and its WACC is 10%. 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 tasks/ questions: a. Allied has a standard form that is used in the capital budgeting process. (See Table IC 12.1.) Part of the table has been completed, but you must replace the blanks with the missing numbers. Complete the table using the following steps: 1. Fill in the blanks under Year 0 for the initial investment outlays: CAPEX and ANOWC. 2. Complete the table for unit sales, sales price, total revenues, and operating costs excluding depreciation 3. Complete the depreciation data. 4. Complete the table down to after-tax operating income and then down to the project's operating cash flows, EBIT(1 - T) + DEP.

Answer 1

Introduction:

Cash flow:

It refers to the value which are used in and out of business which will lead to affect the liquidity of the company.

Initial Investment - Capital Structure:

Particulars	Amount in $
Equipment Cost	200,000
Shipping and Installation Cost	40,000
Total	240,000

Therfore, Initial Investment for capital structure is $ 240,000.

Allied lemon Juice Project('000)		(in $)
End Of the year			0	1	2	3	4
1. Investment Outlays
Equipment cost			-200
Installation			-40
CAPEX			-240
Increase in inventory			-25
Increase in A/P			5
NOWC			-20
2. Projects opertaing Cash flow
Unit Sales ('000)				100	100	100	100
	price/unit			$2	$2	$2	$2
	Total revenue			$200	$200	$200	$200
	Operating Cost excluding dep.			120	120	120	120
	Depreciation			79.2	108	36	16.8
	Total Cost			$199.20	$228.00	$156.00	$136.80
	EBIT(or operating Cost)			0.8	-28	44	63.25
	Taxes on Opertaing Income			0.3	-11.2	17.6	25.3
	EBIT(1--T)= After tax operating inc.			0.48	16.8	26.4	37.95
	add depreciation			79.2	108	36	16.8
	EBIT (1-T)+Dep		-260	79.7	91.2	62.4	54.7
	3. Project Termination
	Cashflow
	Salvage Value (tax as ordinary )						25
	Tax on salvage						10
	After tax salvage value						15
	NOWC						20
	EBIT(1-T)		-260	79.7	91.2	62.4	89.7
	here,EBIT (1-T)+DEP-CAPEX-NOWC

Since there is no BV,salvage vvalue is taxable as a whole.

conclusion:

If there is a short period of years, then the NPV will be higher,then there will be a less no. of cash flow to add the initial investment.