Final Case Project
Suppose that the Cott Corporation (Symbol COT) is considering adding a new product line. Currently, Cott sells apple juice and they are considering selling a new fruit drink. The fruit drink will have a selling price of $1.64 per container. The plant has excess capacity in a fully depreciated building to process the fruit drink product line. The new fruit drink will be discontinued in four years. The new equipment falls under the 3-year MACRS depreciation schedule. The new fruit drink requires an increase in inventory of $275,000, an increase in accounts receivable of $135,000, and an increase in accounts payable of $110,000. Projected sales are 4,000,000 containers in the first year, with a 9% growth rate for each subsequent year. Variable costs are 60% of total revenues and fixed costs are $1,250,000 each year. The new equipment costs $2,500,000 and has a salvage value of $500,000. The corporate tax rate for Cott is 35%.
Cott currently has 1,100,000 bonds outstanding with a 5.38% coupon rate (paid semi-annually) and 8 years left until maturity. They are selling at 98% of par.
You will gather current market data (price, beta, & shares outstanding) on Cott's common stock from Yahoo! Finance.
Remember from project #3, beta and shares outstanding are under 'Key Statistics' in Yahoo! Finance.
The monthly expected return on the S&P 500 (SPY) that we calculated from project #3 was 1.19%.
Multiplying this by 12 will give you a reliable estimate of the expected return on the market.
The risk-free rate is 1.2%.
Required
*Unless the value is given above (or pulled straight from Yahoo! Finance), all cells highlighted in yellow require a calculation done using formulas.
*Do not forget the correct sign convention
*Double-check your calculations using your calculator
1. Calculate the WACC for the company using the 'WACC' tab below.
2. Create pro-forma income statements for the incremental cash flows from this project using the
Enter formulas to calculate the PV of each year's cash flows in row 36.
(You can either use the EXCEL formula PV() or use mathmatical formula for PV of a lump sum.)
The NPV is simply the sum of the PVs of all years' cash flows
3. Create a NPV profile using the 'NPV Profile'.