Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is

Question

Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years:

The project can be operated at the company's Charleston plant, which is currently vacant.

The project will require that the company spend $3.99 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on a straight-line basis over 5 years. Thus, the firm's annual depreciation expense is $3,990,000/5 = $798,000. The company plans to use the equipment for all 3 years of the project. At t = 3 (which is the project's last year of operation), the equipment is expected to be sold for $1,700,000 before taxes.

The project will require an increase in net operating working capital of $730,000 at t = 0. The cost of the working capital will be fully recovered at t = 3 (which is the project's last year of operation).

Expected high-protein energy smoothie sales are as follows:

The project's annual operating costs (excluding depreciation) are expected to be 60% of sales.

The company's tax rate is 40%.

The company is extremely profitable; so if any losses are incurred from the high-protein energy smoothie project they can be used to partially offset taxes paid on the company's other projects. (That is, assume that if there are any tax credits related to this project they can be used in the year they occur.)

The project has a WACC = 10.0%.

What is the project's expected NPV and IRR? Round your answers to 2 decimal places. Do not round your intermediate calculations.

NPV

IRR %

SSC is considering another project: the introduction of a "weight loss" smoothie. The project would require a $3.6 million investment outlay today (t = 0). The after-tax cash flows would depend on whether the weight loss smoothie is well received by consumers. There is a 40% chance that demand will be good, in which case the project will produce after-tax cash flows of $2.5 million at the end of each of the next 3 years. There is a 60% chance that demand will be poor, in which case the after-tax cash flows will be $0.55 million for 3 years. The project is riskier than the firm's other projects, so it has a WACC of 11%. The firm will know if the project is successful after receiving the cash flows the first year, and after receiving the first year's cash flows it will have the option to abandon the project. If the firm decides to abandon the project the company will not receive any cash flows after t = 1, but it will be able to sell the assets related to the project for $2.5 million after taxes at t = 1. Assuming the company has an option to abandon the project, what is the expected NPV of the project today? Round your answer to 2 decimal places. Do not round your intermediate calculations. Use the values in "millions of dollars" to ascertain the answer.
$ millions of dollar
s

Year Sales 1 $2,100,000 2 7,900,000 3 3,200,000 Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years: The project can be operated at the company's Charleston plant, which is currently vacant. The project will require that the company spend $3.99 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on a straight-line basis over 5 years. Thus, the firm's annual depreciation expense is $3,990,000/5 = $798,000. The company plans to use the equipment for all 3 years of the project. At t = 3 (which is the project's last year of operation), the equipment is expected to be sold for $1,700,000 before taxes. The project will require an increase in net operating working capital of $730,000 at t = 0. The cost of the working capital will be fully recovered at t = 3 (which is the project's last year of operation). Expected high-protein energy smoothie sales are as follows: The project's annual operating costs (excluding depreciation) are expected to be 60% of sales. The company's tax rate is 40%. The company is extremely profitable; so if any losses are incurred from the high-protein energy smoothie project they can be used to partially offset taxes paid on the company's other projects. (That is, assume that if there are any tax credits related to this project they can be used in the year they occur.) The project has a WACC = 10.0%. What is the project's expected NPV and IRR? Round your answers to 2 decimal places. Do not round your intermediate calculations. NPV IRR % SSC is considering another project: the introduction of a "weight loss" smoothie. The project would require a $3.6 million investment outlay today (t = 0). The after-tax cash flows would depend on whether the weight loss smoothie is well received by consumers. There is a 40% chance that demand will be good, in which case the project will prod ce after-tax cash flows of $2.5 million at the end of each of the next 3 years. There is a 60% chance that demand will be poor, in which case the after-tax cash flows will be $0.55 million for 3 years. The project is riskier than the firm's other projects, so it has a WACC of 11%. The firm will know if the project is successful after receiving the cash flows the first year, and after receiving the first year's cash flows it will have the option to abandon the project. If the firm decides to abandon the project the company will not receive any cash flows after t = 1, but it will be able to sell the assets related to the project for $2.5 million after taxes at t = 1. Assuming the company has an option to abandon the project, what is the expected NPV of the project today? Round your answer to 2 decimal places. Do not round your intermediate calculations. Use the values in "millions of dollars" to ascertain the answer. $ millions of dollar

Explanation / Answer

All Amounts in $ Sunshine Smoothies Company Charleston Plant Project In order to calculate the NPV, we need to have the following information : Annual Income, Yearwise, Net of Taxes 1 2 3 Sales 2100000 7900000 3200000 Cost of Sales 1260000 4740000 1920000 Contribution Margin 840000 3160000 1280000 Depreciation 798000 798000 798000 Net Income before taxes 42000 2362000 482000 Tax Impact @ 40% 16800 944800 192800 Post Tax Net Income 25200 1417200 289200 Add : Depreciation 798000 798000 798000 After Tax Cash Flows 823200 2215200 1087200 Investment in Project at t = 0 Purchase price of Equipment 3990000 Operating Working Capital required 730000 Total Cash Outflows at t = 0 4720000 Cash Inflow at the end of year 3 2430000 WACC = 10% Given the information above, the NPV of the Project for the protein-energy smoothies works out to $305,145.08 $0.31 million IRR is calculated using the Trial-and-error method Hence, the IRR for this project works out to 12.88% For the "Weight Loss" Smoothie Cash Inflows expected Probability Take by Income Weighted Customers per year Income 40% Good Demand 2500000 1000000 60% Poor Demand 550000 330000 Total 1330000 Sale Value of Equipment at t = 1 2500000 Cash Outflows Outlay for Equipment 3600000 WACC = 11% Given the information above, the NPV of the Project today for "Weight-Loss" Smoothie works out to ($335,806.95) ($0.34) million

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