Finance Project Deliverable

TABLE IC11 ALLIED’S LEMON JUICE PROJECT (TOTAL COST IN THOUSANDS) END OF YEAR: 0 2 3 4I. 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
PRICE/UNIT $ 2.00 $ 2.00 $2.00 $2.00
TOTAL REVENUES $200 $200_ $200_ $200.0
OPERATING COSTS, EXCLUDING DEPRECIATION $120.0 $120.0 $120.0 $120.0
DEPRECIATION $79.2 $108.0 36.0 16.8
TOTAL COSTS $199.2 $228.0 $156.0 $136.8
OPERATING INCOME BEFORE TAXES $ 0.8 -28.0 $ 44.0 $63.2
TAXES ON OPERATING INCOME 0.3 0.0 $17.6 25.3
OPERATING INCOME AFTER TAXES $ 0.5 $-28.0 $ 26.4 $37.9
DEPRECIATION ______ 79.2 $108.0 36.0 $16.8
OPERATING CASH FLOW $ 0.0 $ 79.7 $80.0 $62.4 54.7
III. TERMINAL YEAR CASH FLOWS
RETURN OF NET OPERATING WORKING CAPITAL 14%
SALVAGE VALUE $25.0
TAX ON SALVAGE VALUE $10.0
TOTAL TERMINATION CASH FLOWS $35.0
IV. NET CASH FLOWS
NET CASH FLOW ($260.0) $79.7 $80.0 $62.4 $ 89.7
V. RESULTS (Question d.)
NPV = $ 246.7
IRR = 8%
MIRR = 10%
PAYBACK = Year 4
References
Brigham, E. F. &amp. Houston, J. F. (2004). Fundamentals of financial management (10th ed.). United States: Thomson South-Western.
The Lemon Juice Project of Allied shows positive cash operating profit from T_1 onwards though the payback on investment is Year 4 when the capital outlay of $ 260,000 is fully recovered.
Despite the fact that the cash inflows in all the years are the same, yet net operating cash income is different in these years. This is due to the differing depreciation rates on the capital assets and consequent tax amount paid on the income. The cash paid on account of taxes differs in each year. In the T_2 year when the depreciation rate is maximum, there is operating loss and so tax is nil. Hence cash operating income is maximum in this year.
If the equipment were sold for less than the book value, there would have been loss to the extent of the difference between the book value and sale realization. This loss would have further reduced the business income resulting in lowering tax further.