Allied Lemon Juice Project
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Allied uses debt in its capital structure, so some of the money used to finance the project will be debt. Given this fact, should the projected cash flows be revised to show projected interest charges? Explain.
Suppose you learned that Allied had spent $50,000 to renovate the building last year, expensing these costs. Should this cost be reflected in the analysis? Explain.
Now suppose you learned that Allied could lease its building to another party and earn $25,000 per year. Should that fact be reflected in the analysis? If so, how?
Now assume that the lemon juice project would take away profitable sales from Allied's fresh orange juice business. Should that fact be reflected in your analysis? If so, how?
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Allied uses debt in its capital structure, so some of the money used to finance the project will be debt. Given this fact, should the projected cash flows be revised to show projected interest charges? Explain.
The cash flows should not be revised for the interest. Whatever be the capital structure of financing, the cost of capital in incorporated in the discounting rate. Even if some of the financing is debt, the total cost of capital, which will include some interest also, is already ...
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