Nut Roast Limited, producers of fine quality scorched almonds, is considering introducing a new line of...
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Nut Roast Limited, producers of fine quality scorched almonds, is considering introducing a new line of chilled drinks. However, despite careful consideration, the company has been unable to decide whether they should undertake a project that would see them produce freshly squeezed juice or whether the production of ginger ale is more viable. Unable to make the final decision between these 2 investment opportunities, the company has contacted you, their trusted financial advisor, and asked you whether you could indicate which project, if any, would be the better choice. In asking your advice, the company has told you that the machinery in both projects will have a salvage value of $10,000 at the end of their useful life and would be depreciated straight line over their entire useful life. Details of each project's cash flows are tabulated below: Fresh Squeezed Juice Project Ginger Ale Project Cost Pre-Tax Net Annual Inflow Machine Life $190,000 $20,000 9 years $150,000 $20,000 7 years In addition to cash flow information, you have also been provided with the following details: . . Both investment opportunities are in a different industry to the firm's normal operations; The industry in which both investment opportunities are available is considered 30% more risky than the firm's industry; The firm's beta is 1.5; . The risk-free rate is 5% p.a; The expected return on the market is 10% p.a; and, The tax rate is 30%. Given this information, which project, if any, do you recommend Nut Roast Limited proceed with? What is your reasoning behind making your recommendation? Nut Roast Limited, producers of fine quality scorched almonds, is considering introducing a new line of chilled drinks. However, despite careful consideration, the company has been unable to decide whether they should undertake a project that would see them produce freshly squeezed juice or whether the production of ginger ale is more viable. Unable to make the final decision between these 2 investment opportunities, the company has contacted you, their trusted financial advisor, and asked you whether you could indicate which project, if any, would be the better choice. In asking your advice, the company has told you that the machinery in both projects will have a salvage value of $10,000 at the end of their useful life and would be depreciated straight line over their entire useful life. Details of each project's cash flows are tabulated below: Fresh Squeezed Juice Project Ginger Ale Project Cost Pre-Tax Net Annual Inflow Machine Life $190,000 $20,000 9 years $150,000 $20,000 7 years In addition to cash flow information, you have also been provided with the following details: . . Both investment opportunities are in a different industry to the firm's normal operations; The industry in which both investment opportunities are available is considered 30% more risky than the firm's industry; The firm's beta is 1.5; . The risk-free rate is 5% p.a; The expected return on the market is 10% p.a; and, The tax rate is 30%. Given this information, which project, if any, do you recommend Nut Roast Limited proceed with? What is your reasoning behind making your recommendation?
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