: Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC i

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 $4.9 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 $4,900,000/5 = $980,000. 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 $2,300,000 before taxes.

The project will require an increase in net operating working capital of $650,000 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.

Explanation / Answer

Sunshine Smoothies Company All Amounts in $ The operating income per year from the sale of the smoothies is calculated as given below : Year Sales Cost Depreciation Net Taxes Income Cash Income Post Profits Taxes 1 2400000 1440000 980000 -20000 -8000 -28000 952000 2 7850000 4710000 980000 2160000 864000 1296000 2276000 3 3500000 2100000 980000 420000 168000 252000 1232000 Cost of Equipment -4900000 Increase in Working Capital -650000 Sale Value of Equipment 2300000 WACC 10% Given these values, the Net Present Value of the Smoothies Project is worked out as -$ 658,680.11 The working is based on Cash Profits post taxes Working out the IRR per the trial-and-error method, the IRR works out to 5.67%

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.