Allied foods is evaluating a new product, fresh lemon juice. The required equipment would cost $480,000. Inventories would rise by $50,000, while accounts payable would go by $10,000. The machinery would be depreciated using the 3=year MACRS system. (Year 1=33%, Year 2=45%, Year 3=15% and Year 4=7%) The project is expected to operate 4 years, at which time it will be terminated. At the end of the projects life, the eqquipment is expected to have a salvage value of $55,00. Unit sales are excepted to total 200,000 cans per year. Similar products are fetching $2.00 per unit now, and expected inflation is 5% per year for the next four years. Operating cost less depreciation are excepted to be 60 percent of sales. Allied tax rate is 40% and its WACC is 10%. The lemon jucie project is an average risk project.
a. Calculate the initial investment, operating cash flows and terminal cash flows.
b. What is the NPV of this project?
c. What is the IRR of this project?
d. What is the Payback Period?