1. (50 points) The BestDrinkEver (BDE) Inc. is planning to introduce avocado flavored water to its...

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1. (50 points) The BestDrinkEver (BDE) Inc. is planning to introduce avocado flavored water to its flavored water product line. They started to plan for this new product a year ago. The BDE asked a market research company to conduct a market analysis for this new flavor 6 months ago and agreed to pay $130,000 on the day the research findings are presented to the top management of the BDE. The market research company has completed its report and presented its findings to the top management of the BDE today. As a result, the BDE has to make the payment for this report to the market research company today. According to the report prepared by the market research company, the BDE can expect to sell $455,000 worth of avocado flavored water per year for the next 5 years. Unfortunately, the sale of its other flavored water products is expected to decline by $25,000 in year 1 as a result of adding this new flavor. The lost sales from its other flavored water products will remain constant at $25,000 per year over the 5-year life of the new project. The total production and selling cost for the new product is estimated to be $96,000 per year. The BDE will realize cost savings of $5,000 each year because of its lost sales from other flavored water products. To produce avocado flavored water, the BDE has to buy a new machine which will cost $1,000,000 today. It is classified as a 7-year MACRS asset and will be depreciated as such during the term of the project. The expected resale value of the machine at the end of 5 years is $120,000. Furthermore, the production of avocado flavored water will require an additional net working capital investment of $50,000 immediately. The net working capital need of the project decreases to $25,000 at the end of year 1, and then to $10,000 at the end of year 2. Any remaining additional investment in net working capital for this project will be reversed at the end of year 5. The marginal tax rate is 40% for the BDE Inc., and the company requires a return of 13% from projects like this. a. Calculate the operating cash flows for years 1 through 5. b. Calculate the net capital spending at times 0 and 5. c. Calculate the change in net working capital from year 0 to 5. d. Decide if BDE should invest in avocado flavored water production project and state why. 2. (50 points) The Sleeping Beauty Knitting Company (SBKC) plans to replace one of its knitting machines with a newer and more efficient model. The old knitting machine was bought 4 years ago for $750,000, and the company paid an additional $20,000 for installation and insurance. The company has been depreciating this machine to a value of 0 using the straight-line depreciation method over years. However, the old knitting machine can still be used for 6 more years in the production process and SBKC expects to sell this old machine for $60,000 6 years from today. However, if the company decides to replace the old machine now, it can sell the old machine to another firm in the industry for $440,000. The new machine has a purchase price of $1,200,000. The company will depreciate this new machine to a value of 0 using the straight-line method over 8 years as well. SBKC can also use this new machine for six years in its production process. The SBKC expects that this new machine will have a resale value of $180,000 after six years. This new machine is expected to decrease electricity, labor, 1 and repair costs, and the number of defective fabrics produced. Because of all these reductions, annual cost savings of $230,000 per year will be realized in years 1 through 3 if the new machine is purchased to replace the old one. The annual cost savings will decrease to $210,000 per year for years 4 through 6. Furthermore, because of the lower breakage of the new machine, the company can reduce the inventory it carries by $25,000 at time 0 and keep it at that level for the duration of this project. The company's tax rate is 35% and the required rate of return on projects like this is 14%. a. Calculate the operating cash flows for years 1 through 6. b. Calculate the net capital spending at times 0 and 6. c. Calculate the change in net working capital from year 0 to 6. d. Decide if SBKC should replace the old machine with the new one and state why. 1. (50 points) The BestDrinkEver (BDE) Inc. is planning to introduce avocado flavored water to its flavored water product line. They started to plan for this new product a year ago. The BDE asked a market research company to conduct a market analysis for this new flavor 6 months ago and agreed to pay $130,000 on the day the research findings are presented to the top management of the BDE. The market research company has completed its report and presented its findings to the top management of the BDE today. As a result, the BDE has to make the payment for this report to the market research company today. According to the report prepared by the market research company, the BDE can expect to sell $455,000 worth of avocado flavored water per year for the next 5 years. Unfortunately, the sale of its other flavored water products is expected to decline by $25,000 in year 1 as a result of adding this new flavor. The lost sales from its other flavored water products will remain constant at $25,000 per year over the 5-year life of the new project. The total production and selling cost for the new product is estimated to be $96,000 per year. The BDE will realize cost savings of $5,000 each year because of its lost sales from other flavored water products. To produce avocado flavored water, the BDE has to buy a new machine which will cost $1,000,000 today. It is classified as a 7-year MACRS asset and will be depreciated as such during the term of the project. The expected resale value of the machine at the end of 5 years is $120,000. Furthermore, the production of avocado flavored water will require an additional net working capital investment of $50,000 immediately. The net working capital need of the project decreases to $25,000 at the end of year 1, and then to $10,000 at the end of year 2. Any remaining additional investment in net working capital for this project will be reversed at the end of year 5. The marginal tax rate is 40% for the BDE Inc., and the company requires a return of 13% from projects like this. a. Calculate the operating cash flows for years 1 through 5. b. Calculate the net capital spending at times 0 and 5. c. Calculate the change in net working capital from year 0 to 5. d. Decide if BDE should invest in avocado flavored water production project and state why. 2. (50 points) The Sleeping Beauty Knitting Company (SBKC) plans to replace one of its knitting machines with a newer and more efficient model. The old knitting machine was bought 4 years ago for $750,000, and the company paid an additional $20,000 for installation and insurance. The company has been depreciating this machine to a value of 0 using the straight-line depreciation method over years. However, the old knitting machine can still be used for 6 more years in the production process and SBKC expects to sell this old machine for $60,000 6 years from today. However, if the company decides to replace the old machine now, it can sell the old machine to another firm in the industry for $440,000. The new machine has a purchase price of $1,200,000. The company will depreciate this new machine to a value of 0 using the straight-line method over 8 years as well. SBKC can also use this new machine for six years in its production process. The SBKC expects that this new machine will have a resale value of $180,000 after six years. This new machine is expected to decrease electricity, labor, 1 and repair costs, and the number of defective fabrics produced. Because of all these reductions, annual cost savings of $230,000 per year will be realized in years 1 through 3 if the new machine is purchased to replace the old one. The annual cost savings will decrease to $210,000 per year for years 4 through 6. Furthermore, because of the lower breakage of the new machine, the company can reduce the inventory it carries by $25,000 at time 0 and keep it at that level for the duration of this project. The company's tax rate is 35% and the required rate of return on projects like this is 14%. a. Calculate the operating cash flows for years 1 through 6. b. Calculate the net capital spending at times 0 and 6. c. Calculate the change in net working capital from year 0 to 6. d. Decide if SBKC should replace the old machine with the new one and state why.

Answer rating: 100% (QA)

a To calculate the operating cash flows for years 1 through 5 we need to consider the revenues costs and tax implications associated with the avocado flavored water project Year 0 Initial investment M... View the full answer