Pure Life (a juice company) owns a building, which is fully depreciated.
Equipment Cost: $200,000. plus an additional $40,000. for shipping and installation
Inventories would rise by $25,000. and accounts payable would go up by $5,000. All of these costs would be incurred at t =0.
The machinery could be depreciated under the MACRS system as a 3-year property. Applicable depreciation rates are 33%, 45%, 15% and 7%.
The project will operate for 4 years and will then be terminated. Cash flows are assumed to being 1 year after the project is undertaken, or at t=1 and will continue out to t=4. At the end of the project, (t=4), the equipment is expected to have a salvage value of $25,000.
Unit sales are expected to total 100,000 cans per year and the expected sales price is $2.00 per can. Cash operating costs are expected to total 60% of dollar sales. Pure Life's tax rate is 10%.
Net Present Value, Modified Internal Rate of Return and Regular Payback are investigated. The solution is detailed and well presented. The response received a rating of "5/5" from the student who originally posted the question.