Allied Food Products Integrated Case Summary

A. Basic Information of Case Answers/ Result/Findings

Dat
a/
Rati
o/I
nfo
rma
tion
Equipment Cost –with Salvage Value $ 25,000 $
200
,00
0
Shipping & Installation Cost $
40,
000
Increase in Inventory $
25,
000
Increase in Accounts Payable $
5,0
00
Life of Equipment 4
yea
rs
Tax Rates
40
%
WACC 10
%
Sales Price & No of Sold Units $2
&
100
,00
0
Uni
ts
Operating Cost excluding Depreciation 60
%
of
sale
s
Depreciation Rates-MACRS 33
%,
45
%,1
 5%
&
07
%
C )Required :Calculate : Pay Pack Period Pay 3.36 months
Bac
k
Peri
od
Net Present Value (NPV) NP ($4.92)
V at
10
%
PV
IRR IRR 9.2396%
at
PV
(10
%-
9%)
b. (1) In case debt is used to finance project Inte Interest cost is already part of WAAC %
rest
Cos
ts
to
be
pai
d
shal
l be
con
side
red
her
e
b-(2)) Renovation Expense of $50,000 Last Not considered in cash flows Sunk Cost-related to
Yea history.
r
eve
nt-
Hist
ory
b-3) Fully Depreciated Building Usage on lease Cou Opportunity cost can be considered in decision
out. ld making. P.426 (12-2c)
be
Lea
se
 ren
tal
inc
om
e$
25,
000
b-4) Lemon juice project would take away Effe Externalities are often difficult to quantify, Lemon
profitable sales away from orange juice business, ct juice project will affect the cash flows from
should be reflected here? of orange juice resulted decrease in sales of orange
Can juices.
nib
aliz
atio
n–
p.
426
(12-
2B)
c. Disregard all assumptions in part( b) WA Accept or reject the project
AC Payback period 3.36months, NPV($4.92) IRR
10 9.2396%
%-
Pay
Bac
k
Peri
od,
NP
V,
IRR
d. What Changes are to be made in case if the Cha Changes in Cash flows for differentials or
project had been Replacement instead of nge incremental analysis.
expansion? s in
cas
h
flo
ws,
risk
s
etc.
,
e. Risks of Project Typ CV measures Standalone risk of a single asset
es, holding risk i.e, measures risk of return ( NPVσ ) .It
eas is better measure than standard deviation for
y comparing risks of assets. see p.280, 274,434
me
 asu
rem
ent.
corr
ela
tion
bet
we
en
ret
urn
on
ass
et
wh
en
eval
uati
ng (
mo
vin
g -,
+)
the
effe
ct
of a
ne
w
ass
et/
proj
ect,
on
the
ove
rall
por
tfoli
o
risk
.
f. Sensitivity Analysis +,-, See page 431
10
%,2
0%,
30
%
 in
h. Inflation Rate 5% Table IC12.2
PA
i. State of Economy- Find-Payback,
NPV, IRR under each condition
Best- 50% 125 Pay Back 2.29 years, NPV 58$ , IRR 19.826%
,00
0
unit
s
Worst/poor 25%- 75, Pay Back 3.24 years, NPV (28)$ , IRR 4.46835%
000
unit
s
Base/ Average Acceptance-50% 100 Pay Back 3.15 years, NPV $ 15, IRR 12.06%
,00
0
unit
s
j. Risk Measurement- Expected NPV, CV Ranges 1.2 2- Higher side breached upper limit
5–
1.7
5
k. Risk Measurement- based upon common sense Cor -Read below
Highly Correlation Coefficient the project with rela
other assets ( Correlation coefficient, range of Co tion
efficient) bet
we
en
ret
urn
on
ass
et
wh
en
eval
uati
ng (
mo
vin
g -,
+)
the
effe
ct
of a
 ne
w
ass
et/
proj
ect,
on
the
ove
rall
por
tfoli
o
risk
.-
J. Relationship between Correlation Coefficient & A Say: State of Economy is strong leading to people
Standard deviation ( NPVσ ) of the project cor shall be more buying and sales of company
calculated rel products thus indicating A +ve  correlation
Standard deviation of a distribution of absolute ati this project and with rest of business.
projects returns measure of dispersion of mean on Thus, each line (Lemon & Fruit Juices)
value or expected value (P). Higher standard “O could be treated as successful with A
deviation indicates greater riskier project. ” in Correlation Value > +1, this may be
Correlation measures relationship between two dic between + .7 or within the range of +.05-
variables. The measure is best used in variables ate +.9.
that demonstrate a linear relationship between s”
each other. No
Rel
atio
nsh
ip”
bet
we
en
the
vari
abl
es.
A c
orr
ela
tio
n o
f –1
indi
cat
es
a
per
fect
neg
ativ
e c
orr
ela
tio
n, 
me
ani
ng 
that
as
one
vari
abl
e
goe
s
up,
the
oth
er
goe
s
do
wn.
A
per
fect
ly p
osi
tiv
e
cor
rel
ati
on 
me
ans
that
100
%
of
the
tim
e,
the
vari
abl
es
in
que
stio
n
mo
ve
tog
eth
er
by
the
exa
ct
sa
me
per
cen
tag
e
and
dire
ctio
n. 
A
+v
e
cor
rel
ati
on
co
effi
cie
nt i
ndi
cat
es
that
an
incr
eas
e in
the
first
vari
abl
e
wo
uld
cor
res
pon
d to
an
incr
eas
e in
the
sec
ond
vari
abl
e,
thu
s
imp
lyin
ga
dire
ct
rela
tion
shi
p
bet
we
en
the
vari
abl
es.
A
-ve 
cor
rel
ati
on 
indi
cat
es
an
inv
ers
e
rela
tion
shi
p
wh
ere
as
one
vari
abl
 e
incr
eas
es,
the
sec
ond
vari
abl
e
dec
rea
ses

m. Relate Correlation Coefficient with General Sinc The proposed project would have + correlation
Economy, return on “Market” Relate Correlation e with return on other assets especially “Stock
with the economy affects project’s market risk. co Market” the guess may be between + .7 or
pro within the range of +.05- +.9.
duc
es
foo
d
ite
ms
hav
ing
less
elas
ticit
y
me
ans
peo
ple
con
tinu
e to
con
su
me
or
eat
in
de
ma
nd
thu
s
 less
risk
y
tha
n
the
Eco
no
my
Gen
eral
.
n. Risk Adjusted WACC & state subjective factors +,-
for decision. 3% NPV = 13% ($ 2,227)- Reject or 7% $34,117-
to Accept. Subjective factors for decision like
WA projects assets can be deployed within company
AC or can be sold out easily in the market making
rate the project less risky.
10
%;
WA
AC
10
%,
7%
or
13
%
calc
ulat
e-
NP
V,
IRR
Optional Part- Additional Changes- Depreciation Ma
Method-p.424 table12-1 nag
em
ent
Disc
reti
ona
ry
dec
isio
n
Straight Line Method- Pay Back, NPV, IRR (Last Calc Pay Back 3.9 years, NPV ($39.81) , IRR 2.4661 %
part of solution) ulat
 e
Rev
ised
Cas
h
infl
ows
afte
r
tax
es
und
er
cha
nge
d
poli
cy-

Always Remember : Basic Approach to Calculate Cash Inflows After Taxes

Net Income/Profit After Taxes

Add: Non Cash Expenses Reported in P&L

Depreciation, Provisions, Losses etc.,

Less: Gains Reported in P & L

A. LIst Step (Blank Cash Flows Pro forma $ 000)

End of Year 0 1 2 3 4 Total

I. Investments/(Out Flows)
Equipment Cost
Installation
CAPITAL EXP (CAP EX)
+ inventory
+ Account Payable
NOWC (N. Operating W. Cap)
II. Operating Cash Flows
Units Sales (000)
Per Unit Price $
T. Sales
Less: Operating Costs excluding
Depreciation
Less: Depreciation Expenses
Total Cost
EBIT/operating Income
Taxes 40%
Profits After Taxes
Add: Depreciation Expenses
III. Project Termination Cash Flows
Gross Salvage Value
Tax on Salvage Value 40%
After Tax Salvage Vale
Recovery of NOWC
Cash Inflows after Taxes
10 % PV Factor ,909 .826 .751 .683
10 % PV of Cash Inflows
Net Present Value

B.Second Step- Fill out Performa- $ 000)

End of Year 0 1 2 3 4 Total

I. Investments/(Out Flows)
Equipment Cost (200)
Installation (40)
CAPITAL EXP (CAP EX) (240) (240)
+ inventory (25)
+ Account Payable 5
NOWC (N. Operating W. Cap) (20) (20)
II. Operating Cash Flows
Units Sales (000) 100 100 100 100
Per Unit Price $ 2 2 2 2
T. Sales 300 200 200 200
Less : Operating Costs excluding 120 120 120 120
Depreciation (sales 200x.6) or $ 1.2
Less :Depreciation Expenses* % 79.2 108 36 16.8
(240) 33%, 45%, 15% , 07%
Total Cost 199.2 228 156 156.8
EBIT/operating Income 0.80 (28.0) 44.0 63.2
Taxes 40% 0.32 (11.2) 17.6 25.3
Profits After Taxes 0. 48 (16.8) 26.4 25.3
Add: Depreciation Expenses 79.20 108.0 36.0 16.8
III. Project Termination Cash Flows
Gross Salvage Value 25
Tax on Salvage Value 40% (10)
After Tax Salvage Vale 15 15
Recovery of NOWC 20
Cash Inflows after Taxes 79.68 91.20 62.4 89.2
10 % PV Factor ,909 .826 .751 .683
10 % PV of Cash Inflows 72.43 74.88 46.85 60.92 255.08
Net Present Value (4.92)
9% PV Factor

Years- Cash Recoverable Amount Payback Period WAAC PV of WAAC 9%7 PV of Cash flows at
1 Flows-2 Needed Balance Required-4 Cash 9% B-8 ( 2x7)
10%-5
flows at
10% A-6 (
2x5)
0 (260) (260) 1 (260) 1 (260)
1 79.68 79.68 (180.32) 1 year .909 72.43 .917 73.08
2 91.20 91.20 (89.12) 1 year ..826 74.88 .842 76.79
3 62.4 62.4 (26.72) 1 .751 46.85 .772 48.17
4 89.2 89.2-26.7 0 3.6 months .683 60.92 .708 63.51
89.2/12
Total of inflows 255.08 261.55
NPV (4.92) 1.55

IRR = 9 % + 1.55/1.55-(4.92)x1% = 9% + 1.55/6.47x1% = 9% + 0.2396

(.2395x.01) =9.2396% < 10% (cost of return)

IRR = 10% - ( 4.92)/(4.92)- 1.55 x1% = 10% - 4.92/6.47x1% = 10 % - 0.7604

(.76043266x.01) =9.2396%

 Depreciation Calculations
Title of Amount MACR Book Value Option B Subtracting Book Value at end
Equipment (000) Method Salvage Value $ 25 of accounting year
Equipment 200
Installation 40
Cost
Depreciable 240 240
Amount
Ist year Dep (79.4) 240- 240-25 = 215x.33 = 240 -70.95 =
33%x 240 79.4=160.6 (70.95) 169.05
wdv
2nd Year Dep (108) 240-79.4- 215x.45= (96.45) 240-70.95-96.45 =
-45%x240 108=52.6 72.60
3rd Year- (36) 240-79.4-108- 215 x.15 = (32.25) 240-70.95-96.45-
15%x240 36=16.6 32.25= 40.25
4th Year- (16.8) 240-(240)=0 215 x.07 = (15.05) 240--70.95-96.45-
07%x240 32.25-15.05 = 25
Total 240 0 Total Accumulated Cost $240-
Depreciation ($ 215) $215( Accumulate
d Depreciation)=$
25
Tax Impact:

79.4 -70.95 = 8.45x.4 = $3.38(Less Tax Payment); 108-96.45=11.55x.40= $4.62;

36-32.25=3.75x.4 =$ 1.5; 16.8-15.05= 1.75x.4=$0.70

h. Allied Lemon Juice with 5% Inflation

End of Year 0 1 2 3 4 Total
I. Investments/(Out Flows)
Equipment Cost (200)
Installation (40)
CAPITAL EXP (CAP EX) (240) (240)
+ inventory (25)
+ Account Payable 5
NOWC (N. Operating W. Cap) (20) (20)
II. Operating Cash Flows
Units Sales (000) 100 100 100 100
Per Unit Price up 5 % each year $ 2.1 2.205 2.431
2.315
T. Sales 210 220.5 231.5 243.1
Less : Operating Costs excluding 126 132.3 138.9 145.9
Depreciation (sales 210x.6)
Less :Depreciation Expenses* 79.2 108 36 16.8
Total Cost 205.2 240.3 174.9 162.7
EBIT/operating Income 4.8 (19.80) 56.6 80.70
Taxes 40% 1.92 (7.92) 22.64 32.28
Profits After Taxes 2. 88 (11.88) 48.42
33.96
Add: Depreciation Expenses 79.20 108.0 36.0 16.8
III. Project Termination Cash Flows
Gross Salvage Value 25
Tax on Salvage Value 40% (10)
After Tax Salvage Vale 15 15
Recovery of NOWC 20
Cash Inflows after Taxes 82.08 96.12 69.96 100.22
10 % PV Factor ,909 .826 .751 .683
10 % PV of Cash Inflows 74.61 79.39 52.54 68.45 $274.99
Net Present Value $ 14.99 or
$ 15

Pay Back Period & IRR Calculations (Base Condition

Years- Cash Recoverable Amount Payback Period WAAC PV of Cash WAAC 13%7 PV of Cash flows at
1 Flows-2 Needed Balance Required-4 flows at 19% B-8 ( 2x7)
10%-5
12% A-6
( 2x5)
0 (260) (260) 1 (260) 1 (260)
1 82.08 82.08 (177.92) 1 year .909 .885 72.66
74.61
2 96.12 96.12 (81.80) 1 year ..826 .783 75.25
79.39
3 69.96 69.96 (11.84) 1 .751 .691 48.37
52.54
4 100.22 100.22-11.84 0 1.15 months .683 .613 61.43
100.22/12
68.45
Total of inflows 257.57
274.99
NPV $ 15 ( 2.29)
IRR = 13 % - (2.29)/(2.29)-15x3% = 13% - (2.29) /6.47x1% = 13% - 0.397
(.1324465x.03) = 12.602%

IRR = 10% + 15/15- (2.29) x3% = 10% + 15/17.29 x1% = 10 % + 2.606

(.8675534x.03) = 12.606%

A. Worst Scenario of 75,000

End of Year 0 1 2 3 4 Total
I. Investments/(Out Flows)
Equipment Cost (200)
Installation (40)
CAPITAL EXP (CAP EX) (240) (240)
+ inventory (25)
+ Account Payable 5
NOWC (N. Operating W. Cap) (20) (20)
II. Operating Cash Flows
Units Sales (000) 75 75 75 75
Per Unit Price up 5 % each year $ 2.1 2.205 2.431
2.315
T. Sales 157.5 165.4 173.6 182.3
Less : Operating Costs excluding 99.2 104.2 109.4
Depreciation (sales 157.5x.6)
94.5
Less :Depreciation Expenses* 79.2 108 36 16.8
Total Cost 173.7 207.2 140.2 126.2
EBIT/operating Income (16.2) (41.8) 33.4 56.1
Taxes 40% (6.5) (16.7) 13.4 22.4
Profits After Taxes (9.7) (25.1) 20 33.70
Add: Depreciation Expenses 79.20 108.0 36.0 16.8
III. Project Termination Cash
Flows
Gross Salvage Value 25
Tax on Salvage Value 40% (10)
After Tax Salvage Vale 15 15
Recovery of NOWC 20
Cash Inflows after Taxes 69.5 82.9 56 85.5
10 % PV Factor ,909 .826 .751 .683
10 % PV of Cash Inflows 63.18 68.48 42.10 58.40 232
Net Present Value (28)

B. Worst Scenario of 75,000 Payback & IRR

Years- Cash Recoverable Amount Payback Period WAAC PV of WAAC 4%7 PV of Cash flows at
1 Flows-2 Needed Balance Required-4 19% B-8 ( 2x7)
10%-5 Cash
 flows at
10% A-6
( 2x5)
0 (260) (260) 1 (260) 1 (260)
1 69.5 69.5 (190.5) 1 year .909 63.18 .962 66.86
2 82.9 82.9 (107.6) 1 year ..826 68.48 .925 76.68
3 56 56 (51.6) 1 .751 42.10 .889 49.78
4 85.5 85.5- 51,6 0 3.24 months .683 58.40 .822 70.28
85.5-51.6/12
Total of inflows (232) 263.6
NPV (28) 3.60
Worst Situation 125,000 units

IRR = 4% + 3.60/3.6-(28)x6% = 4% + 3.60/31.6x6% = 4% + 0.45569

(.113924x.06) = 4.45569%

IRR = 10% - ( 28)/(28)- 3.6 x6% = 10% - 28/31.6x% = 10 % - 5.316455

(.8860759x.06) = 4.6835%
C. Best Situation 125,000 units

End of Year 0 1 2 3 4 Total

I. Investments/(Out Flows)
Equipment Cost (200)
Installation (40)
CAPITAL EXP (CAP EX) (240) (240)
+ inventory (25)
+ Account Payable 5
NOWC (N. Operating W. Cap) (20) (20)
II. Operating Cash Flows
Units Sales (000) 125 125 125 125
Per Unit Price up 5 % each year $ 2.1 2.205 2.431
2.315
T. Sales 262.5 275.6 289.4 303.9
Less : Operating Costs excluding 157.5 165.4 173.4 182.4
Depreciation (sales 262.5x.6)
Less :Depreciation Expenses* 79.2 108 36 16.8
Total Cost 236.7 273.4 209.6 199.2
EBIT/operating Income 25.8 2.2 80 104.7
Taxes 40% 10.3 .4 32 41.9
Profits After Taxes 15.5 1.8 48 62.8
Add: Depreciation Expenses 79.20 108.0 36.0 16.8
III. Project Termination Cash
Flows
Gross Salvage Value 25
Tax on Salvage Value 40% (10)
After Tax Salvage Vale 15 15
Recovery of NOWC 20
Cash Inflows after Taxes 94.7 109.8 84 114.6
10 % PV Factor ,909 .826 .751 .683
10 % PV of Cash Inflows 86.1 90.7 63.1 78.3 318.2
Net Present Value 58
Best Situation 125,000 units –PayBack & IRR Calculations
Years- Cash Recoverable Amount Payback Period WAAC PV of WAAC 20% 7 PV of Cash flows at
1 Flows-2 Needed Balance Required-4 Cash 19% B-8 ( 2x7)
10%-5
flows at
10% A-6
( 2x5)
0 (260) (260) 1 (260) 1 (260)
1 94.7 94.7 (165.3) 1 year .909 86.1 .833 78.89
2 109.8 109.8 (55.5) 1 year ..826 90.7 .694 76.20
3 84 84 -55.5 0 2.29months .751 63.1 .579 48.64
84/12
4 114.6 114.6 .683 78.3 .482 55.24
Total of inflows 318.2 258.97
NPV 58.2 (1.03)
Best Situation 125,000 units IRR Calculations

IRR = 10% + 58/58-(1.03)x10% =10%+ 58/59.03 x10% = 10% + 9.28255

(.98255125x.10) = 19.826%

IRR = 20% - ( 1.03)/(1.03)- 56 x10% = 20% - 1.03/59.03 x% = 20 % - 0.174487

(.017448x.10) = 19.826%
State of Economy NPV Probability Expected NPV P(NPV - Expected NPV)2
No of Units Sold (NPV x Probability)
Worst-75,000 ($ 28) 0.25 28x.25 =( 7) .25(-28 -15.05)2 = 463.3
Base- 100,000 $ 15 0.50 15x.50 = 7.5 .5(15 -15.05)2 = .0013
Best-125,000 $ 0.25 58.2 x.25 = 14.55 .25(58.2 -15.05)2=465.5
58.2
Total $15.05 928.8
Standard Deviation NPV = 30.5

CV = 30.5/15.05 = 2.02 Higher side Risk breaching upper range CV Range 1.25
to 1.75

 Depreciation Calculations under Two Methods MARC & Straight Line

Title of Amount MACR Book Value Straight Line Method Book Value Difference
Equipment (000) Method between Dep Tax
& Accounting
Equipment 200
Installation 40
Cost
Depreciable 240 240-25/4=53.75 240-53.75=186.25
Amount
Ist year Dep 79.4 240- 53.75 240-53.75=186.25 79.4 -53.75 =25.65
33%x 240 79.4=160.6
2nd Year Dep 108 240-79.4- 53.75 240-53.75- 108-53.75 =54.25
-45%x240 108=52.6 53.75=132.50
3rd Year- 36 240-79.4-108- 53.75 240-53.75-53.75- 36-53.75 =(17.75)
15%x240 36=16.6 53.75=78.75
4th Year- 16.8 240-240=0 53.75 240-53.75-53.75- 16.8-53.75 =
07%x240 53.75-53.75=25 (36.95)
Total 240 0 215 215 = Salvage
Value $ 25

Change in Depreciation Policy- Fill out Performa- $ 000)

End of Year 0 1 2 3 4 Total

I. Investments/(Out Flows)
Equipment Cost (200)
Installation (40)
CAPITAL EXP (CAP EX) (240) (240)
+ inventory (25)
+ Account Payable 5
NOWC (N. Operating W. Cap) (20) (20)
II. Operating Cash Flows
Units Sales (000) 100 100 100 100
Per Unit Price $ 2 2 2 2
T. Sales 200 200 200 200
Less : Operating Costs excluding 120 120 120 120
Depreciation (sales 200x.6)
Less :Depreciation Expenses* 53.75 53.75 53.75 53.75
Total Cost 173.75 173.75 173.75 173.75
EBIT/operating Income 26.25 26.25 26.25 26.25
Taxes 40% 10.5 10.5 10.5 10.5
Profits After Taxes 15.75 15.75 15.75 15.75
Add: Depreciation Expenses 53.75 53.75 53.75 53.75
III. Project Termination Cash
Flows
Gross Salvage Value 25
Tax on Salvage Value 40% (10)
After Tax Salvage Vale 15 15
Recovery of NOWC 20
Cash Inflows after Taxes 69.50 69.50 69.5 69.5
10 % PV Factor ,909 .826 .751 .683
10 % PV of Cash 63.18 57.41 52.13 47.47 220.19
Inflows
Net Present Value OR (39.81)
Investment $(000) (260)
10%PV of inflows 69.5 x 220
3.169(read 4 years value 10 %
PV annuity table )
NPV (39.8
1)

Calculation of Pay Back Period under Changed Depreciation Policy:

Pay Back Period = Invested Funds/ Annual Cash Inflows

= 260/69.5 = 3.74 year or 3 years and 9 months

IRR = Discount Rate equates (F) = PV value of Invested funds=PV of Inflows

(260) = 69.5F or 260/69.5 = 3.74 ( Now trace this factor PV annuity /cumulative
table under 4 years values)

2% 3.898 > F 3.74 = - 0.158 IRR= 2%+ (.158)/(.181)-.158x1%=.4661x.01= 2% +.4661 =2.4661%

3% 3.717 < F 3.74 = + 0.023

0..181

IRR= 3%- (.181)/(.181)-.158x1%=.x.01= 3% -..5339 =2.4661%

Problem # 12-2 Colsen Communications

Sales $ 15 Million; Operating Cost (Excluding depreciation) $ 10.5 Million

Depreciation Expenses $ 3 Million Interest Expenses $ 3 Million

Tax Rates 40 % and WACC 11

Profit & Loss Account-

sales $ 15 Million
Operating Cost(Excluding depreciation) ($ 10.5) Million
Depreciation Expenses ($ 3.0) Million
EBIT $ 1.5 Million
Interest Expenses ( $ 3 ) Million
Profit / (Loss) Before Taxes (1.5)
Tax Rate 40% (0.6)
Profit/(Loss) after taxes (0.9)

a) Cash inflow for the first year

Net Profit/ (Loss) After Taxes $(0.9) Million

Add back Non- Cash Expenses-Depreciation $ 3.0 Million

Cash inflows after taxes $2.1Million

B Change in “a” where this project Cannibalize other project by $ 1.5 million of
cash inflows before taxes: $ 1.5 x .4 (Tax rate) = 0.6 = 0.90 million to reduce the
cash inflows by that amount, now cash inflow after would be $2.1- 0.9 = $ 1.2M

D. If tax Rate is 30%=

Profit/Loss before Tax $ (1.5) M
Tax .3 $(0.45)M
Profit /(Loss) after tax $(1.05)M
Add: Dep. Exp. 3.00M
Cash inflows after taxes 1.95M