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    Capital Budgeting and Cash Flow Estimation

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    The lemon juice would be produced in an unused building adjacent to Allied's Fort Myers plant; Allied owns the building, which is fully depreciated. The required equipment would cost $200,000, plus an additional $40,000 for shipping and installation. In addition, inventories would rise by $25,000, while accounts payable would go up by $5,000. All of these costs would be incurred at t=0. By a special ruling, the machinery would be depreciated under the MACRS system as 3-year property. The applicable depreciation rates are 33%, 45%, 15%, and 7%.
    The project is expected to operate for 4 years, at which time it will be terminated. The cash inflows are assumed to begin 1 year after the project is undertaken, or at t=1, and to continue ot to t=4. At the end of the project's life (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 proce is $2.00 per can. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60% of $ sales. Allied's tax rate is 40%, and its weighted average cost of capital is 10%. Tentatively, the lemon juice project is assumed to be of equal risk to Allied's other assets.

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    Solution Summary

    Capital Budgeting and Cash Flow Estimation are achieved.