Data In order to produce the new product, Vitasoy will acquire new equipment at

ID: 2808322 • Letter: D

Question

Data In order to produce the new product, Vitasoy will acquire new equipment at a cost of $5 million It will depreciate this capital expenditure over the 5 years of this project on a straight line basis This means the project will have an annual depreciation expense of $5M Annual Depreciation =-= -$1M The new energy drink is expected to be marketed for 5 years. Over those 5 years, Vitasoy projects the following sales figures End of Year Units Sold (in 000s) 5000 7000 10000 8000 4000 Av. Price Per Unit 1.60$1.60 $1.75 $1.75 $1.75 Sale (in $000s) $8,000 $11,200 $17,500 $14,000 $7,000 In terms of costs, Vitasoy projects the following: Gross Profit Margin: 25%. This means that it expects the cost of producing each can (COGS) to be 75% of the sale price. ·Operating Expenses: 6% of sales (listed as selling, general, and administrative) Corporate Tax Rate: 40% . Opportunity Cost of Capital: 10% In terms of Net Working Capital, Vitasoy projects the following: . Cash: 2% of sales . Inventory: 3% of sales . Receivables: 15% of sales Payables: 15% of cost of COGS » Year 5: Assume all four items go back to zero

Explanation / Answer

Particulars Year
1 2 3 4 5
No. of Units (in 000) 5000 7000 10000 8000 4000
Avg Price 1.6 1.6 1.75 1.75 1.75
Sale (In 000) 8000 11200 17500 14000 7000
Gross Profit 2000 2800 4375 3500 1750
Operating exp. 480 672 1050 840 420
Depreciation 1000 1000 1000 1000 1000
Net Profit 520 1128 2325 1660 330
Corporate Tax @ 40% 208 451.2 930 664 132
Net Profit After Tax 312 676.8 1395 996 198
Depreciation 1000 1000 1000 1000 1000
Net Cash Flow 1312 1676.8 2395 1996 1198
Net Working Capital
Cash Required 160 224 350 280
Inventory 240 336 525 420
Receivable 1200 1680 2625 2100
Payable 900 1260 1968.75 1575
Net Working Capital 700 980 1531.25 1225
Cost of Working Capital 70 98 153.125 122.5 0
Free Cash Flow after working capital cost 1242 1578.8 2241.875 1873.5 1198
Annuity Factor 0.91 0.83 0.75 0.68 0.62
Present Value 1129.091 1304.793 1684.354 1279.626 743.8637

Process 1
Particulars Year
1 2 3 4 5
No. of Units (in 000) 5000 7000 10000 8000 4000
Avg Price 1.6 1.6 1.75 1.75 1.75
Sale (In 000) 8000 11200 17500 14000 7000
Gross Profit 2000 2800 4375 3500 1750
Operating exp. 480 672 1050 840 420
Depreciation 1000 1000 1000 1000 1000
Net Profit 520 1128 2325 1660 330
Corporate Tax @ 40% 208 451.2 930 664 132
Net Profit After Tax 312 676.8 1395 996 198
Depreciation 1000 1000 1000 1000 1000
Net Cash Flow 1312 1676.8 2395 1996 1198
Net Working Capital
Cash Required 160 224 350 280
Inventory 240 336 525 420
Receivable 1200 1680 2625 2100
Payable 900 1260 1968.75 1575
Net Working Capital 700 980 1531.25 1225
Cost of Working Capital 70 98 153.125 122.5 0
Free Cash Flow after working capital cost 1242 1578.8 2241.875 1873.5 1198
Annuity Factor           0.91           0.83           0.75           0.68           0.62
Present Value 1129.091 1304.793 1684.354 1279.626 743.8637
Sum of PV 6141.728
Amount Invested 5000
NPV 1141.728
Process 2
Particulars Year
1 2 3 4 5
No. of Units (in 000) 5000 7000 10000 8000 4000
Avg Price 1.6 1.6 1.75 1.75 1.75
Sale (In 000) 8000 11200 17500 14000 7000
Gross Profit 1600 2240 5250 3500 1750
Operating exp. 480 672 1050 840 420
Depreciation 1000 1000 1000 1000 1000
Net Profit 120 568 3200 1660 330
Corporate Tax @ 40% 48 227.2 1280 664 132
Net Profit After Tax 72 340.8 1920 996 198
Depreciation 1000 1000 1000 1000 1000
Net Cash Flow 1072 1340.8 2920 1996 1198
Net Working Capital
Cash Required 160 224 350 280
Inventory 240 336 525 420
Receivable 1200 1680 2625 2100
Payable 960 1344 1837.5 1575
Net Working Capital 640 896 1662.5 1225
Cost of Working Capital 64 89.6 166.25 122.5 0
Free Cash Flow after working capital cost 1008 1251.2 2753.75 1873.5 1198
Annuity Factor           0.91           0.83           0.75           0.68           0.62
Present Value 916.3636 1034.05 2068.933 1279.626 743.8637
Sum of PV 6042.836
Amount Invested 5000
NPV 1042.836
No, Management should stick on 1 st Option
Process 3
Particulars Year
1 2 3 4 5
No. of Units (in 000) 5000 7000 10000 8000 4000
Avg Price 1.6 1.6 1.75 1.75 1.75
Sale (In 000) 8000 11200 17500 14000 7000
Gross Profit 2000 2800 4375 3500 1750
Operating exp. 480 672 1050 840 420
Depreciation 1000 1000 1000 1000 1000
Net Profit 520 1128 2325 1660 330
Corporate Tax @ 40% 208 451.2 930 664 132
Net Profit After Tax 312 676.8 1395 996 198
Depreciation 1000 1000 1000 1000 1000
Net Cash Flow 1312 1676.8 2395 1996 1198
Net Working Capital
Cash Required 160 224 350 280
Inventory 240 336 525 420
Receivable 1200 1680 2625 2100
Payable 900 1260 1968.75 1575
Net Working Capital 700 980 1531.25 1225
Cost of Working Capital 70 98 153.125 122.5 0
Free Cash Flow after working capital cost 1242 1578.8 2241.875 1873.5 1198
Annuity Factor           0.91           0.83           0.75           0.68           0.62
Present Value 1129.091 1304.793 1684.354 1279.626 743.8637
Sum of PV 6141.728
Present Vaue of Salvage Value after tax i.e. *(2200 -0 =2200, and after tax is 1320 :- 1320*.62 = 819.62 819.62
Amount Invested 5000
NPV 1961.348

Particulars Year 1 2 3 4 5 No. of Units (in 000) 5000 7000 10000 8000 4000 Avg Price 1.6 1.6 1.75 1.75 1.75 Sale (In 000) 8000 11200 17500 14000 7000 Gross Profit 2000 2800 4375 3500 1750 Operating exp. 480 672 1050 840 420 Depreciation 1000 1000 1000 1000 1000 Net Profit 520 1128 2325 1660 330 Corporate Tax @ 40% 208 451.2 930 664 132 Net Profit After Tax 312 676.8 1395 996 198 Depreciation 1000 1000 1000 1000 1000 Net Cash Flow 1312 1676.8 2395 1996 1198 Net Working Capital Cash Required 160 224 350 280 Inventory 240 336 525 420 Receivable 1200 1680 2625 2100 Payable 900 1260 1968.75 1575 Net Working Capital 700 980 1531.25 1225 Cost of Working Capital 70 98 153.125 122.5 0 Free Cash Flow after working capital cost 1242 1578.8 2241.875 1873.5 1198 Annuity Factor 0.91 0.83 0.75 0.68 0.62 Present Value 1129.091 1304.793 1684.354 1279.626 743.8637

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Data In order to produce the new product, Vitasoy will acquire new equipment at

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