Final Case Project- Suppose a beverage company is considering adding a new product line…

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.