Hawaiian Coconut Milkshakes Inc. is considering the following project. They would like to expand in the pineapple branch as well. The firm has paid $100,000 to a consultant in order to find out more about the available projects and possibilities. The marketing department has done extensive consumer research on the potential demand for the new shakes. The total costs for this research has been $75,000. Based on this research, you are now considering opening up a Pineapple Juice division in the firm. The expected sales for this project are $1,600,000 per year for the next 3 years. Accepting the project would mean that you will use one of your currently owned empty storage units. This storage unit consists of a 12,000 square feet building, for which you paid $50,000 in 1985. This storage unit has been fully depreciated and has a current market value of $60,000. Accepting the project would also mean that your current coconut shake sales are affected. In fact, you expect to see your current revenues from coconut shakes of $1 million each year increase by 10% because of the pineapple project. Manufacturing plant and equipment for this project (other than the storage unit) would cost $900,000 and will be depreciated according to a straight-line method (include the half-year convention). The market value of the manufacturing plant and equipment at the end of the project (t = 3) is $150,000. Variable costs are projected at 70% of sales. There are no fixed costs associated with the project. The project will be financed with $1,000, 3-year bonds, with a coupon rate of 9%. Net working capital requirements are $25,000 at the start, and then respectively 12% and 18% of sales in t = 1, and t = 2. At t = 3 the NWC investments will be recovered. The required rate of return on this project is 21% and the corporate tax rate is 34%.
 

Calculate the NPV and IRR for this project and indicate whether you should accept or reject the pineapple project?

(Hint: figure out for t=0,1,2,3 what the cash flows from the project are (cash flow from assets). Use the identities we have learned in class: CF from Assets = Operating CF + additions to NWC + Net Capital Spending. Operating CF = EBIT + Depreciation - Taxes