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INDIAN RIVER CITRUS COMPANY CASE DISCUSSION QUESTIONS Question 1 Define the term "incremental cash flow." Since the project will be financed in part by debt, should the cash flow statement include interest expenses? Explain. Question 2 Should the $100,000 that was spent to rehabilitate the plant be included in the analysis? Question 3 Suppose another citrus producer had expressed an interest in leasing the lite orange juice production site for $25,000 a year. If this were true (in fact, it was not), how would that information be incorporated into the analysis? Question 4 What is Indian River's Year 0 net investment outlay on this project? What is the expected non-operating cash flow when the project is terminated at Year…show more content…
(Hint: The Year 1 cash flows, as well as succeeding cash flows, must be adjusted for inflation because the original estimates are in Year 0 dollars.) Question 9 The second capital budgeting decision which Lili and Brent were asked to analyze involves choosing between two mutually exclusive projects, S and L, whose cash flows are set forth below: -- Expected Net Cash Flow -- Year Project S Project L 0 ($100,000) ($100,000) 1 60,000 33,500 2 60,000 33,500 3 — 33,500 4 — 33,500 Both of these projects are in Indian River's main line of business, orange juice, and the investment, which is chosen, is expected to be repeated indefinitely into the future. Also, each project is of average risk, hence each is assigned the 10 percent corporate cost of capital. a. What is each project's single-cycle NPV? Now apply the replacement chain approach and then repeat the analysis using the equivalent annual annuity approach. Which project should be chosen, S or L? Why? b. Now assume that the cost to replicate Project S in two years is estimated to be $105,000 because of inflationary pressures. Similar investment cost increases will occur for both projects in Year 4 and beyond. How would this affect the analysis? Which project should be chosen under this assumption? Question 10 The third project to be considered involves a fleet of delivery trucks with an

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