Question;Final;Case Project;Suppose;a beverage company is considering adding a new product line.;Currently;the company sells apple juice and they are considering selling a fruit drink.;The;fruit drink will have a selling price of $1.00 per jar. The plant has excess capacity in a;fully;depreciated building to process the fruit drink. The fruit drink will be discontinued in;four years.;The;new equipment is depreciated to zero using straight line depreciation. The;new fruit drink requires;an;increase in working capital of $25,000;and $5,000 of this increase is offset with accounts payable.;Projected;sales are 150,000 jars of fruit drink the first year, with a 20 percent;growth for the following years.;Variable;costs are 55% of total revenues and fixed costs are $10,000 each year. The new equipment costs;$195,000;and has a salvage value of $25,000.;The;corporate tax rate is 35 percent and the company currently has 1,000,000;shares of stock outstanding;at;a current price of $15. The company;also has 50,000 bonds outstanding, with a current price of $985. The;bonds;pay interest semi-annually at the coupon rate is 6%. The bonds have a par value of $1,000 and;will;mature;in twenty years.;Even;though the company has stock outstanding it is not publicly traded. Therefore, there is no publicly;available;financial information. However;management believes that given the industry they;are;in the most reasonable comparable publicly traded company is Cott Corporation;(ticker symble;is;COT). In addition, management believes;the S&P 500 is a reasonable proxy for the market portfolio.;Therefore;the cost of equity is calculated using the beta from COT and the market risk;premium based on the;S&P;500 annual expected rate of return.;(We calculated a monthly expected return for the market;in;the return exercise. You can simply;multiply that rate by 12 for an expected annual rate on the;market.);The WACC is then calculated using this information and the other information;provided;above. Clearly show all your calculations and;sources for all parameter estimates used in the WACC.;Required;1.;Calculate the WACC for the company.;2.;Create a partial income statement incremental cash flows from this project in;the;Blank Template worksheet using the tab;below.;3.;Enter formulas to calculate the NPV by finding the PV of the cash flows over;the next four years.;(You can either use the EXCEL formula PV();or use mathmatical formula for PV of a lump sum.);4.;Set up the EXCEL worksheet so that you are able to change the parameters in;E3 to E12.;Run three cases best, most likely, and;worst case where the growth rate is 30%, 20%, and 5%;respectfully.;5.;Create a NPV profile for the most likely case scenario. (See NPV Calculation tab below.);6.;State whether the company should accept or reject the project for each case;scenario.;7.;Turn in your project in the drop box.
Paper#47487 | Written in 18-Jul-2015Price : $34