Assessment: Lite orange juice Project

1. Define the term “incremental cash flow”. Since the project will be financed in part by debt, should the cash flow analysis include the interest expense?

Incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project. A positive incremental cash flow means that the company 's cash flow will increase with the acceptance of the project.

Cash flow analysis should not include the interest expense. We discount project cash flows with a cost of capital that is the rate of return required by all investors. Interest expenses are part of the costs of capital. If we subtracted them from cash flows, we would be double counting capital costs.*…show more content…*

The opportunity cost of renting the plant is included in the analysis as a after tax cost (cash outflow) because it will not be earned as a result of utilizing the asset for the project.

The cannibalization on Classic orange juice is a type of externality that should be included in the analysis as after tax cost (cash outflow) because the new project takes sales away from the existing product.

The new project requires an increase in inventories in year 0 and year 3. This will change the net working capital. It will represent an outflow for year 0 and 3, and an inflow when the project terminates because we will recover it.

5. The project is assumed to end in year 4. Do you think that this is realistic? Can you estimate the value of the project’s operating cash flows beyond year 4? State any assumptions you made.

This project is reasonable and worth to take it. It will add more value to the company since its NPV is positive and has an attractive IRR and MIRR (higher than WACC). Moreover, the breakeven occurs in year two, in the middle of the project lifecycle, which is a good sign as well.

Calculations to estimate the following years 5 and 6 are done in the excel tab called ‘Estimation Years 5 and 6’. Taking into account that the predicted remaining

1. Define the term “incremental cash flow”. Since the project will be financed in part by debt, should the cash flow analysis include the interest expense?

Incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project. A positive incremental cash flow means that the company 's cash flow will increase with the acceptance of the project.

Cash flow analysis should not include the interest expense. We discount project cash flows with a cost of capital that is the rate of return required by all investors. Interest expenses are part of the costs of capital. If we subtracted them from cash flows, we would be double counting capital costs.

The opportunity cost of renting the plant is included in the analysis as a after tax cost (cash outflow) because it will not be earned as a result of utilizing the asset for the project.

The cannibalization on Classic orange juice is a type of externality that should be included in the analysis as after tax cost (cash outflow) because the new project takes sales away from the existing product.

The new project requires an increase in inventories in year 0 and year 3. This will change the net working capital. It will represent an outflow for year 0 and 3, and an inflow when the project terminates because we will recover it.

5. The project is assumed to end in year 4. Do you think that this is realistic? Can you estimate the value of the project’s operating cash flows beyond year 4? State any assumptions you made.

This project is reasonable and worth to take it. It will add more value to the company since its NPV is positive and has an attractive IRR and MIRR (higher than WACC). Moreover, the breakeven occurs in year two, in the middle of the project lifecycle, which is a good sign as well.

Calculations to estimate the following years 5 and 6 are done in the excel tab called ‘Estimation Years 5 and 6’. Taking into account that the predicted remaining

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