Indian river citrus company case answers

ndian River’s management is currently evaluating a new product—lite orange juice. Studies done by the firm’s marketing department indicate that many people who like the taste of orange juice will not drink it because of its high calorie count. The new product would cost more, but it would offer consumers something that no other competing orange juice product offers—35percent less calories. Lili Romero and Brent Gibbs, recent business school graduates who are now working at the firm as financial analysts, must analyze this project, along with two other potential investments, and then present their findings to the company’s executive committee.

Production facilities for the lite orange juice product would be set up in an unused section of Indian River’s main plant. Although no one has expressed an interest in this portion of the plant, management wants to know how the analysis could incorporate the interest of another citrus in leasing the lite orange juice production site for $25,000 a year. Relatively inexpensive, used machinery with an estimated cost of only $600,000 would be purchased, but shipping costs to move the machinery to Indian River’s plant would total $20,000, and installation charges would add another $50,000 to the total equipment cost. Further, Indian River’s inventories (raw materials, work-in-process, and finished goods) would have to be increased by $10,000 at the time of the initial investment. The machinery has a remaining economic life of four years, and the company has obtained a special tax ruling that allows it to depreciate the equipment under the MACRS 3-year class. Under current tax law, the depreciation allowances are 0.33, 0.45, 0.15, and0.07 in Years 1 through 4, respectively. The machinery is expected to have a salvage value of$100,000 after four years of use.

The section of the main plant where the lite orange juice production would occur has been unused for several years, and consequently it has suffered some deterioration. Last year, as part of a routine facilities improvement program, Indian River spent $100,000 to rehabilitate that section of the plant. Brent believes that this outlay, which has already been paid and expensed for tax purposes, should be charged to the lite orange juice project. His contention is that if the Case 12 Indian River Citrus Company (A)Capital Budgeting Directed rehabilitation had not taken place, the firm would have to spend the $100,000 to make the site suitable for the orange juice production line.