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Frozen Turkeys Scenario Cost of Land $ 200,000 Cost of Buildings & Equipment $ 3

ID: 2654564 • Letter: F

Question

Frozen Turkeys Scenario

Cost of Land                                                               $ 200,000

Cost of Buildings & Equipment                                $ 350,000

MACRS Class                                                                        20

Life of Project (Years)                                                            5

Terminal Value of Land                                             $ 300,000

Terminal Value of Buildings & Equipment              $ 175,000

First year sales (pounds)                                                250,000

Price per Pound                                                                  $3.50

Unit Sales Growth Rate                                                      7.0%

Variable Costs as % of Sales                                                62%

Fixed Costs                                                                       75,000

Tax Rate                                                                                35%

WACC                                                                                10.0%

a. Prepare a statement of annual cash flows for years 0 through 5. Cash flows in year 0 are your expenses for building and land.

Sales growth is based on the annual growth rate in units.

Assume no changes in fixed or variable costs.

Depreciate the project cost for 5 years, with the cash flow in year 5 to include the terminal cash flow of ending the investment.

b. Calculate the NPV,

c. profitability index,

d. IRR,

e. MIRR,

f. payback and

g. discounted payback of the cash flows   

h Using scenario manager find best case, worst case, base case of NPV based on sales in pounds, price per pound, and variable cost percent. Make sure to include scenario summary.

Explanation / Answer

Depreciation = (350000-175000)/5 = 35000

Tax saving on dep = 35000*0.35 = 12250

Calculation of taxable income per year

Operating Income

(Taxable income - tax)

a. Annual Cash flows statement

b. NPV

c. Profitability index = PV of Cash Inflows / PV of Cash Outflows

                                = 930078/550000 = 1.69

d. NPV @ 30%

IRR = Lower rate + Lower rate NPV / (Lower rate NPV - HIgher rate NPV)

       = 10 + 380078/[380078-(-118625)] = 10.76%

Year 1 2 3 4 5 Sales($) 875000 936250 1001788 1071913 1146947 - Variable Cost -542500 -580475 -621109 -664586 -711107 Fixed Cost -75000 -75000 -75000 -75000 -75000 Depreciation -35000 -35000 -35000 -35000 -35000 Taxable Income 222500 245775 270679 243327 325840

Operating Income

(Taxable income - tax)

144625 159754 175941 158163 211796