Information for Moonkist Orange Juice Project

Moonkist is a manufacturer orange juice concentrate products. The company is considering entering a new product market, the manufacture and sale of fresh-squeezed orange juice. The proposed project will last for four years, after which, the equipment will be sold at salvage and the project terminated.

Production would occur in an unused portion of the existing plant. Last year, the company spent $500,000 to repair this section of the plant. If the unused space is not used for this project, it can be rented out to a local produce company for $100,000 per year before taxes. Machinery would cost $500,000. Shipping , installation, and setup charges would be $100,000. Working capital would increase by $50,000 at the time of the initial investment. The working capital will be recovered at the end of the project.

The machinery will be depreciated under MACRS using a 4 year life, with 33%, 45%, 15%, and 7% of the cost being depreciated in years 1-4 respectively. The full cost of the machinery and setup will be depreciated. The machinery is expected to have a salvage value of $75,000 after 4 years of use.

Sales are expected to be 200,000 cartons for each of the next four years at a price of $4.00 per can the first year, and growing by inflation of 5% per year thereafter. Operating costs are expected to be $2.00 per can for the first year, and growing by inflation of 4% per year thereafter. These costs will vary proportionately with the number of cans produced.

The fresh-squeezed orange juice will cannibalize some sales concentrate products. It is expected that concentrate sales will be $50,000 less each year, and operating costs will be $20,000 less.

Moonkist’s cost of capital is 10 percent and its marginal tax rate is 35 percent. Any losses on this project will be offset against taxable income from Moonkist’s other product lines.

Using the information provided for Moonkist, compute the relevant cash flows to evaluate this project (initial investment, annual operating cash flows, and terminal value). Compute the Net Present Value and Internal Rate of Return for the project. Should it be accepted?