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    Fruit Drink Story & Katah

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    spectrum_48
    A beverage company is considering adding a fruit drink product line using excess plant capacity. The fruit drink will be sold for $1 per jar over 4 years, with projected annual sales of 150,000 jars growing 20% annually. Variable costs are 55% of revenues and fixed costs are $10,000 per year. New equipment costs $195,000 with $25,000 salvage value and is depreciated straight line to zero over 4 years. The project requires a $25,000 increase in working capital offset by $5,000 in accounts payable. The summary calculates WACC and sets up a cash flow template to determine NPV at best, most likely, and worst case growth rates to evaluate if the

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    Fruit Drink Story & Katah

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    spectrum_48
    148 views5 pages
    A beverage company is considering adding a fruit drink product line using excess plant capacity. The fruit drink will be sold for $1 per jar over 4 years, with projected annual sales of 150,000 jars growing 20% annually. Variable costs are 55% of revenues and fixed costs are $10,000 per year. New equipment costs $195,000 with $25,000 salvage value and is depreciated straight line to zero over 4 years. The project requires a $25,000 increase in working capital offset by $5,000 in accounts payable. The summary calculates WACC and sets up a cash flow template to determine NPV at best, most likely, and worst case growth rates to evaluate if the

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    Katahs

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    A beverage company is considering adding a fruit drink product line using excess plant capacity. The fruit drink will be sold for $1 per jar over 4 years, with projected annual sales of 150,000 jars growing 20% annually. Variable costs are 55% of revenues and fixed costs are $10,000 per year. New equipment costs $195,000 with $25,000 salvage value and is depreciated straight line to zero over 4 years. The project requires a $25,000 increase in working capital offset by $5,000 in accounts payable. The summary calculates WACC and sets up a cash flow template to determine NPV at best, most likely, and worst case growth rates to evaluate if the

    Copyright:

    © All Rights Reserved
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    148 views5 pages

    Fruit Drink Story & Katah

    Uploaded by

    spectrum_48
    A beverage company is considering adding a fruit drink product line using excess plant capacity. The fruit drink will be sold for $1 per jar over 4 years, with projected annual sales of 150,000 jars growing 20% annually. Variable costs are 55% of revenues and fixed costs are $10,000 per year. New equipment costs $195,000 with $25,000 salvage value and is depreciated straight line to zero over 4 years. The project requires a $25,000 increase in working capital offset by $5,000 in accounts payable. The summary calculates WACC and sets up a cash flow template to determine NPV at best, most likely, and worst case growth rates to evaluate if the

    Copyright:

    © All Rights Reserved
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    of 5

    Final Case Project

    Suppose a beverage company is considering adding a new product line.


    Currently the company sells apple juice and they are considering selling a fruit drink.
    The fruit drink will have a selling price of $1.00 per jar. The plant has excess capacity in a
    fully depreciated building to process the fruit drink. The fruit drink will be discontinued in four years.
    The new equipment is depreciated to zero using straight line depreciation. The new fruit drink requires
    an increase in working capital of $25,000 and $5,000 of this increase is offset with accounts payable.
    Projected sales are 150,000 jars of fruit drink the first year, with a 20 percent growth for the following years.
    Variable costs are 55% of total revenues and fixed costs are $10,000 each year. The new equipment costs
    $195,000 and has a salvage value of $25,000.
    The corporate tax rate is 35 percent and the company currently has 1,000,000 shares of stock outstanding
    at a current price of $15. The company also has 50,000 bonds outstanding, with a current price of $985. The
    bonds pay interest semi-annually at the coupon rate is 6%. The bonds have a par value of $1,000 and will
    mature in twenty years.
    Even though the company has stock outstanding it is not publicly traded. Therefore, there is no publicly
    available financial information. However, management believes that given the industry they
    are in the most reasonable comparable publicly traded company is Cott Corporation (ticker symble
    is COT). In addition, management believes the S&P 500 is a reasonable proxy for the market portfolio.
    Therefore, the cost of equity is calculated using the beta from COT and the market risk premium based on the
    S&P 500 annual expected rate of return. (We calculated a monthly expected return for the market
    in the return exercise. You can simply multiply that rate by 12 for an expected annual rate on the
    market.) The WACC is then calculated using this information and the other information provided
    above. Clearly show all your calculations and sources for all parameter estimates used in the WACC.
    Required
    1. Calculate the WACC for the company.
    2. Create a partial income statement incremental cash flows from this project in the
    Blank Template worksheet using the tab below.
    3. Enter formulas to calculate the NPV by finding the PV of the cash flows over the next four years.
    (You can either use the EXCEL formula PV() or use mathmatical formula for PV of a lump sum.)
    4. Set up the EXCEL worksheet so that you are able to change the parameters in E3 to E12.
    Run three cases best, most likely, and worst case where the growth rate is 30%, 20%, and 5%,
    respectfully.
    5. Create a NPV profile for the most likely case scenario. (See NPV Calculation tab below.)
    6. State whether the company should accept or reject the project for each case scenario.
    7. Turn in your project in the drop box.

    Final Case Project


    I. Given the following data on proposed capital budgeting project.
    Economic life of project in years.
    4
    Price of New Equipment
    $195,000
    Fixed Costs
    $10,000
    Salvage value of New Equipment
    $25,000
    Effect on NWC:
    $20,000
    First Year Revenues
    $150,000
    Variable Costs
    55.0%
    Marginal Tax Rate
    35.0%
    Growth Rate
    20.0%
    WACC
    ???
    Spreadsheet for determining Cash Flows (in Thousands)
    Timeline:
    Year
    0
    1
    II. Net Investment Outlay = Initial CFs
    Price
    195,000
    Increase in NWC
    III. Cash Flows from Operations
    Total Revenues
    150,000
    Variable Costs
    (82,500)
    Fixed Costs
    Depreciation
    Earnings Before Taxes
    Taxes
    Net Income
    Depreciation
    Net operating CFs
    IV. Terminal Cash Flows
    Salvage Value
    Tax on Salvage Value
    Return of NWC
    Cash Flows
    Present Value of CFs
    Calculate: NPV

    Note Cells C17 and C18 include the initial cash flows today.
    Collumn D through G are the operating cash flows.
    Cells D30, D31, and D32 include terminal cash flows.

    NPV Calculations

    Creating a NPV Profile


    Discount Rate:
    0%
    2%
    4%
    6%
    8%
    Year
    CF PV(CF) PV(CF) PV(CF) PV(CF) PV(CF)
    0
    1
    2
    3
    4
    NPV
    Discount Rate:
    0%
    2%
    4%
    6%
    8%

    Page 3

    NPV Calculations

    Create a NPV by creating a line graph of rows 9 and 10.


    You may want to use different discount rates in your NPV profile
    Cells B4 to B8 in this worksheet can link to cells C32 to G32 in the Blank Template worksheet.
    Find the present value of cash flows by referencing row 2 for the discount rate.
    You can do column C the same way as you did C33 to G33 in the Blank Template worksheet.
    Rows 9 & 10 are the table that are used to crate the NPV profile graph.

    Page 4

    NPV Calculations

    ate worksheet.

    e worksheet.

    Page 5

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