Question

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. By a special ruling, the machinery could be depreciated under the MACRS system as 4-year property. The applicable depreciation rates are 45 %, 35 %, 15 % , and 5 %. 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 (t= 1), and to continue out to t= 4. At the end of the project's life (t 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 21 %, and its WACC is 10%. Tentatively, the lemon juice project is assumed to be of equal risk to Allied's other assets. M N Part A Years 0 1 2 3 L Investment Outlays Equipment Cost Shipping and Instalation CAPEX 4 45% 36% 15% 55 (200,000 00 (40,000 00) (240.000.00 S Increase in inventorys Increase in Accounts Payable Change in NWC (25.000 00 5,000 00 (20,000.00) B Project Operating Cash Flows Unt Sales Price per Ut Total Revenues 100.000 00 2.00 100,000 00 100,000.00 100.000 00 2.00 $ 200 000 00 $ 120 000.00 $ 200,000 00 120,000 00 200 S 200 000 00 S 120 000 00 2 00 $ 200 000 00 Operating Costs (wio depen) S 120,000 00 Depreciation Depreciation Total Costs 108.000 00S 84.000 00 228.000 00 S 204.000 00 $ 156.000 00 $ 132.000 00 (28.000 00 36.000 00 S 12.000 00 EBIT (Opearting income) Si (4.000 00)S 44.000 00 68.000 00 IV. Operating income Taxes on operating income (5.880 00 S (22,120 00 108.000 00 S 85 880 00 S (840 00 a 54.000.00 80 840 00 9.240.00 S 34.760 00 S 63.72O 00 36.000 00 1 S 14,280 00 Proft after taxes Add back depreciahon Profit after taxes Depn S S 12.000 00 70.760 00 S 65.720 00 V. Project Termination Cash Flows Salvage Value Tax on savage value After Tax salvage value Recover of NWC 25,000 00 (5.250.00) 19.750 00 20000 00 Project Free Cash Flows (260,000 00 120.590.00 S 110.510.00 125,630.00 105,470.00 IN RED IT SAYS (4,840)****

Answer 1

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Weakness of Sensitivity Analysis

1. Doesn’t take in to account the probability of happening an event
2. Doesnot take in to account the interdependence of various factors and treat each one as independent variable

Advantages of Sensitivity Analysis

1. Helps in decision Making
2. Proper Allocation of Resources
3. Helps in Identifying the weak areas to avoid future problems
   D atines Machine Investment 2400 Depreciation Rate 35% 15% 5% Depreciation 108000 84000 36000 12000 Accumulated Deprecia 10NDO 192000 228000 24000D CASH FLOW CALCULATION OF THE PROJECT Qty. to be sold IA) 100000 100000 100000 100000 Sales Price (8) Variable Cost (C) Contribution D=18-C) Total value (AED) 80000 80000 80000 80000 Denreciation Sheat ren Sheet Sheed Shesto Sheet Sheet3 32000 Sheet12 Sheets Sheet13 Sheet14
   
   Full Screen Zoom 100% Page Page Burak Custom layout Preview View Wonpook Views room to New Selection | Window Marras Arrange Freeze Alaries Mestage Bar Show Hd Linde save switch Reset Window Pastron Workspace Windows- Window 1132 Depreciation 10 BAOLO 12 Total Ford Cost BAO 390 Total -28000 -4000 41000 69000 Tak 215 9240 Post Tas 72120 34780 53720 Add: Depreciation 10H000 4000 36000 12000 Cash flow from Income Side 85830 80840 70/60 55720 Recovery of NWC Salvage Value 20000 19750 Cumulative Cash Flow 8 5880 166/20 342050 SUGGE Preceding Balance receaver Cash Flow in 4th Year 10540 Payback Period D-A+B/C 3.21 Years Calculation of Calculation of NPV Calculation of NPV MRR 240000 Cash Outflow Machiney 240000 Machiney + 240000 Shipping Working Sheet11 She Shen 10 Sheet11 She S heet2 Sheet3 Shots Shed 2 She is
   
   Ruler Formula Bar Gridlines Headings Message Bar Show Hide Split Hide w Unhide 1 Zoom Normal Page Page Breck Custom Full Layout Preview Views Screen Workbook Views 100% Zoom to Selection New Window Arrange Freeze All Panes - View Side by Side 1 chonous Scrolning Sch Reset Window Poston I Workspace Windows Window H81 - Call of Calculation of NPY Chlculation of NPV -244000 Cash Outflow Machiney 240000 Machiney 240000 Shipping Workine 20000 Capital 260000 working Capital -20000 250000 a 99 84 % Cash in Flow 10% 5280 Working Capital Income & Salvage Value Total SSRRO 80840 70760 65720 actor WACC 85880 80840 70750 105470 0.9091 0.8254 0.7513 0.6830 78,072./3 66 809.92 53,163.04 72,037.43 BORAD 70760 105470 89& ENTRE 10,083.11 11.74% NPV of the Project is ELL Calculation of MIRR Negatve Cash Flows Positive Cash Flows. Discounted @ WAOC Discounti ng Factor A Reinvestment Facte 1 260,000 10.91 120,655 22 20.83 101,405.70 3 0.75 79,251.20 58 105,470.00
   
   m Hài | Trung Sơng Full Screen Zoom Message Bar 1003 Zoom to Selection Zoom New Window Arrange Free All Pan U nhide Page Page Break Custom Layout Preview news Workbook Views C102 - Rent Window Position Works Showride CASH FLOW CALCULATION OF THE PROJECT Calculation of MIRR Negatve Cash Flows Positive Cash Flows Discounted @ WACC @ 12% Discount ng Factor A Reinvestment Fact B 260,000 0.91 120,655 22 03 101,405.70 0.75 79,25120 0.68 105,470.00 200,000.00 405,782.11 125 11,84% MIRR (Square Root of B/A for the period of Project) 1 Assumption-reinvestment Rate is 12% CASH FLOW CALCULATION OF THE PROJECT-10% increase in Unit sales, Salvage Value & WACE Calculation of Depreciation Machinery Investment 240000 Depreciation Rate 45% 35% 108000 Depreciation 84000 36000 12000 Accumulated Deprecia 108000 192000 228000 240000
   
   Selection Wind A Par i de Reset Window Porno Wa Wand Workbook Views hind 103 Qty. to be sold (A) 105 106 107 108 109 110 Sale Price Variable Cost (C) Contribution D-B-C Total value (AD) BALOO RADDO 2000 BR000 Depreciation 108000 84000 36000 12000 Total Fixed Cost 10000 81000 3 G000 12000 Total 20000 4000 52000 76000 Tax 21% 4200 840 1 0920 15950 - 158 3160 50040 Add Depreciation 108000 840001 12000 Cash Flow from Income Side 92200 87160 72040 190 Recovery of NWCE Salvage Value 20000 21725 132 Chatucha11 Sheet? Sheet3 Sheet12 Sheet13 Sheet14
   
   H159 133 134 Cumulative Cash Flow 92200 1NBRO 370205 Preceding Balance receover Cash Flow in 4th Year 135 186 137 138 139 140 3rd Year Payback period D=A+B/C 3.03 Years Calculation of Calculation of NPV Calculation of NPN -240000 Cash Outflow Machine -240000 Machiney+ 240000 Shipping Working 20000 capital 260000 working Capital -20000 250000 Cash in Flow Factor (11% 92200 Working Capital Income & Salvage Value Total 92200 87160 77080 72040 87160 77080 O9009 0.8116 0.7312 0.6587 83,063.06 70.741,01 56,360 23 74,940.53 77080 113/65 137655 285,104.84 25.104.84 NPV of the Project is Calculation of MIRR Negatve Cash Flows Discounted @ WACC Positive Cash Flows @ 125
   
   AL Calculation of MIRR MNO 160 161 Negarve Cash Flows Positive Cash Flows Discounted @ WACC Discount ng Factor A Reinvestment Factes 260,000 0.90 0.81 0.73 0.66 260,000.00 SMS Saint 13.99% MIRR (Square Root of B/A for the period of Project)-1 Assumption-reinvestment Rate is 12% CASH FLOW CALCULATION OF THE PROJECT-20% decrease in Unit sales, Salvage Value & WAX Calculation of Depreciation Machinery Year Investment 240000 Depreciation Rate 45% 15% 5% 183 184 185 Depreciation 108000 84000 36000 12000 Accumulated Deprecia 108000 192000 228000 240000 187 18R K .Sheets Sheet10 Sheet11 CASH FLOW CALCULATION OF THE DROIECT Sheet1 Sheet2 Sheet3 Sheets Sheet12 Sheet13 Sheet14
   
   299 192 Qry to be sold (A) Sales Price (B) Variable Cost (C) Contribution D=B-C) OR 0.8 Total value (AD) 64000 54000 64000 G4000 Depreciation 108000 84000 36000 12000 Total Fixed Cost 108000 84000 36000 12000 Total 44000 -20000 28000 52000 Tax 21% 9240 4200 5RRO 10920 Post Tax -34760 15800 22120 41080 Add: Depreciation 108000 84000 36000 12000 Cash Flow from Income Side 58120 73240 53080 Recovery of NWC Salvage Value 20000 15800 217 218 219 200 100Kn matha Cach Sheeto Sheet10 73100 Sheet11 141440 Sheet1 Sheet2 Sheet3 Sheets QBAAN Sheeti2Sheet 3 Sheet14
   
   Preceding Balance receover Cash Flow in 4th Year 3rd Year 60440 8888 Payback Period D-A-B/C 3.68 Y Calot Calculation of NPV Calculation of NPV -240000 Cash Outflow Machiney -200000 Machiney + 240000 Shipping Working 20000 Capital 260000 working Capital 20000 Cash in Flow 0.9259 Working Capital Income & Salvage Value Total 73240 68200 58120 53080 35800 Factor @R% WACC 73240 68200 0.8573 58120 0.7938 88880 0.7350 67,814.81 58,470.51 46,137.53 65,329.45 73240 68200 58120 98880 3 4 237,752.31 NPV of the Project is (22,247.69) Calculation of MIRR Negatve Cash Flows Discounted @ WACC Positive Cash Flows @ 12% Discounti
   
   Calcolation of MIRR Negatve Cash Flows Discounted e WACC Discounti ng Factor A Reinvestment Fac 250.000 0.93 0.86 0.79 102,896.93 85,550.08 65 0940 888 00 $42 4241 0.74 260,000.00 7.13% MIRR (Square Root of B/A for the period of Project)-1 Assumption-reinvestment Rate is 12% CASH FLOW CALCULATION OF THE PROJECT-30% Increase in Unit Sales, Salvae Calculation of Depreciation Machiner Investment 240000 Depreciation Rate 45% 35% 269 270 Depreciation 108000 84000 12000 271 272 Accumulated Deprecia Sheets Sheetto 100000 Sheet 192000 Sheet Sheet2 228000 Sheets 240000 Sheet2 Sheets Sheet13 Sheet 14.3 Ready
   
   H306 Qty. to be sold (A) Sales Price (B) Variable Cost(C) 1.2 Contribution D={8-9 08 Total value (AD) 104000 104000 104000! 104000 Depreciation 108000 84000 3G000 12000 Total Fixed Cost 108000 8400 36000 1200013 Total 4000 20000 68000 92000 Tax 21% -840 4200 142801 19320 Post Tax -3160 15800 53720 7 2680 296 297 298 299 300 Add: Depreciation 108000 84000 36000 12000 Cash Flow from Income Side 9800 104840 301 84580 20000 Recovery of NWC Salvage Value 25675 Cumulative Cash Flow 104840 204640 424715 chanti +Chaheche
   
   H333 Preceding Balance cover Cash Flow in 4th Year 3rd Year 55360 89720 Payback Period A.B/C 292 Years Calculation of Calculation of NPV Calculation of NPV 240000 Cash Outflow Machiney -240000 Machine 240000 Shipping Working 20000 Capital 260000 working Capital -2010 250000 Cash In Flow 13% Working Capital Income & Salvage Value Total 104840 99800 89720 BEERD 45675 Factor WACC 1048401 99800 89720! 0.8850 0.7831 0.6931 0.6133 92,778.76 78.158.04 62,180.46 79.949.16 10-1840 99800 89220 130355 250555 315,065.42 53.166.42 IRR NPV of the Project is Positive Cash Flows Calculation of MIRR Negatve Cash Flows Discounted @ WACC Discounti ng Factor A Reinvestment Fact 0 1 260,000 Sheeto Sheet10 Sheet11 Sheet Sheet2 Sheets Sheets Sheet 2 Sheet13 Sheet14
   
   H357 NPV of the Project is 51,06642 Calculation of MIR Positive at Negatve Cash Flows Discounted e WACC Discounti ng Factor A Reinvestment 260,000 0.88 0.78 0.69 0.61 250,000.00 336 337 155,325.07 129,700 OB 102.280 80 130,355.00 517.660 95 3.38 339 17.96% MIRR (Square Root of B/A for the period of Project) 1 Assumption reinvestment Rate is 14%