IndRivsolaa (2) - Case 12 Indian River Citrus Company(A...

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Case 12 Indian River Citrus Company (A) Cash Flow Estimation CASE INFORMATION Purpose This case, which in all aspects is identical to Case 14, first illustrates some of the basic problems encountered in capital budgeting cash flow analysis, after which it introduces inflation effects, common life analysis, and abandonment value. Either Case 12 or Case 14, but not both, should be assigned. The case setting is brief, but the questions open up a myriad of concepts which lend themselves to discussion. Note also that this case is extended, in Part B, to incorporate uncertainty into the capital budgeting decision process. Time Required Approximately 2-3 hours of student preparation time are required, while another hour is needed if students must write up and hand in the case. Using the Lotus model facilitates the numerical analysis. Complexity B--intermediate complexity. Flexibility We have used this case in two ways: (1) We have assigned it as a "regular" case for students to prepare and discuss in class. (2) We have also asked students to read the case at the same time they read the basic text chapters on capital budgeting, but not to work © 1993 The Dryden Press All rights reserved. Case 12-1
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it out in detail, and we then discuss the case as our lecture on capital budgeting cash flow estimation. MODEL INFORMATION Description The model for this case (filename CASE-12I) calculates the lite orange juice project's net cash flows on the basis of project price, sales volume, and other relevant data. Then, the model calculates NPV, IRR, MIRR, and Payback. The model is particularly useful for sensitivity analysis, including the impact of inflation on project profitability. The model's INPUT DATA and KEY OUTPUT sections are shown below: INPUT DATA: KEY OUTPUT: Initial Investment: Price $500,000 NPV $23,720 Freight $20,000 IRR 11.9% Installation $50,000 MIRR 11.1% Change in NWC $10,000 Payback 3.1 Operating Flows and Inflation Rates: Sales volume 425,000 Year 0 sales price $2.00 Operating costs 75.0% Price inflation 0.0% Cost inflation 0.0% Salvage Value, Tax Rate, and Cost of Capital: Salvage value $100,000 Tax rate 40% Cost of capital 10% Effects on Other Projects: Revenue reduction $40,000 Cost reduction $20,000 Model Use We make one of the student versions of the model available to our students. Since these models have some of the formula cells erased, students get an idea about the model's structure while they complete it. Still, to avoid the "black box problem," in our © 1993 The Dryden Press All rights reserved. Case 12-2
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discussion of the case we call on students sufficiently to insure that they are able to do the calculations by hand. CASE SOLUTION Summary of Numerical Answers 4. Net investment outlay = $580,000. Nonoperating terminal cash flow = $70,000. 5. Year Operating Cash Flows NPV: $23,720 1 190,740 IRR: 11.9% 2 218,100 MIRR: 11.1% 3 149,700 Payback: 3.1 years 4 131,460 © 1993 The Dryden Press All rights reserved.
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