Northeastern FINANCE 2209 - Vita-Juice Project Analysis

Vita-Juice Project Analysis

To show your work and to receive credit, please use Excel cell formulas,

financial functions or algebraic time value of money equations to answer these

questions in your spreadsheet.

Vita-Juice is considering jumping on the pomegranate and acai bandwagon by producing

Vita-Poma and Vita-Acai beverages in 2017 (t=1). New production equipment and

facilities costing $30 million will be required in 2016 (t =0) and fall into the 5-year

straight-line depreciation class. Additional net working capital of $5 million will also be

needed in 2016. Here are sales projections for the proposed projects.

Year Expected New Sales

2017 $22 million

2018 $30 million

2019 $25 million

2020 $20 million

Projected operating costs (other than depreciation) are 73% of sales for the new

beverages. However, Vita-Juice estimates that projected sales for other beverages will fall

$5 million in 2017, $9 million in 2018, $7 million in 2019, and $4 million in 2020 if they

introduce the new beverages. Projected operating costs for these existing beverages are

68% of sales. At the end of 2020, the project will end and the production equipment and

facilities could be sold for an estimated $10 million.

Vita-Juice’s marginal tax rate is 40% and this is an average risk project

for the company giving the project a WACC of 9%. Answer the following.

1. What is the initial cost of the project?

2. What are the expected operating cash flows for 2017 thru 2020?

3. What is the expected end of project termination cash flow at the end of 2020?

4. Calculate the NPV and IRR for the proposed project.

5. Should Vita-Juice go ahead with this project? Explain your answer.