Question about Allied Lemon Juice Project
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I am having a problem finding out what the interest rates should be to complete the problem. How do I find the discount rate and the reinvestment rates. I could also use some help on figuring what the system is for determining the payback.
TABLE IC11-1. ALLIED'S LEMON JUICE PROJECT
(TOTAL COST IN THOUSANDS)
Due Week 3 B1 and B2
Due Week 8 B3, B4, &B5
Due Week 9 D
INPUTS: PRICE: $2.00 k: 10% INFL: 0%
VC RATE: 60% T-RATE: 40%
END OF YEAR: 0 1 2 3 4
I. INVESTMENT OUTLAY
EQUIPMENT COST ($200)
INSTALLATION ($40)
INCREASE IN INVENTORY ($25)
INCREASE IN ACCOUNTS PAYABLE $5
TOTAL NET INVESTMENT ($260)
II. OPERATING CASH FLOWS
UNIT SALES (THOUSANDS) 100 100 100 100
PRICE/UNIT $2.00 $2.00 $2.00 $2.00
TOTAL REVENUES $200 $200.00 $200.00 $200.0
OPERATING COSTS,
EXCLUDING DEPRECIATION $120.00 $120.0 $120.00 $120.00
DEPRECIATION $79.20 $108.00 36.0 16.8
TOTAL COSTS $199.2 $228.0 $156.00 $136.80
OPERATING INCOME BEFORE TAXES $0.80 ($28) $44.0 $63.20
TAXES ON OPERATING INCOME 0.3 ($11.20) $17.60 25.3
OPERATING INCOME AFTER TAXES $0.50 ($16.80) $26.4 $37.90
DEPRECIATION 79.2 $108.00 36.0 $16.80
OPERATING CASH FLOW $- $79.7 $91.20 $62.40 $54.7
III. TERMINAL YEAR CASH FLOWS
RETURN OF NET OPERATING WORKING CAPITAL $20.00
SALVAGE VALUE $25.00
TAX ON SALVAGE VALUE ($10.00)
TOTAL TERMINATION CASH FLOWS $35.00
IV. NET CASH FLOWS
NET CASH FLOW $(260.0) $79.70 $91.20 $62.40 $89.7
CUMULATIVE CASH FLOW
FOR PAYBACK: ($260.00) ($180.30) ($89.10) ($26.70) $63.00
COMPOUNDED INFLOWS FOR MIRR: ($106.10) $110.40 $68.60 $89.70
TERMINAL VALUE OF INFLOWS: $374.80
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The posting has the solution to the capital budgeting exercise of Allied Lemon Juice Project
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The discount rate is the rate given to you and is 10% given in cell G8. The discount rate is the same as the reinvestment rate. They are same since the discount rate is the cost of capital and it is assumed that cash would be invested only if it earns ...
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