Question 2. Sammie's Lemonade is a small business that specializes in producing lemonade and selling it over the Internet. The firm opens only for few month around the summer time. This year Sammie's Lemonade was in business only in June, July, and August. In June, the firm bought all the required supplies for the production. The whole bill came up to be $12,000: half of it was paid immediately and another half in July. In total, the firm produced 3,000 bottles, meaning that the cost of one bottle was $4. All the production of lemonade happened in June, while the sales occurred in July and August. Sammie's Lemonade sold 1,000 bottles of lemonade in July and 2,000 bottles in August. Each bottle was sold for $6. All customers paid for their purchases in August. The corporate tax rate is 30%. For simplicity, assume that all the cash flows occur at the end of the month. (a) What is the change in net working capital in every month? (b) What is the firm's NOPAT in every month? (c) What is the firm's free cash flows in every month? (d) If the monthly discount rate is 10%, what is the net present value of the firm's FCFs in the end of June? (e) Sammie's Lemonade plans to renew its business next summer. In an attempt to improve the man- ufacturing process, the firm is considering whether to buy a new juice squeezer. This machine is not expected to affect the number of produce items, but rather the cost of producing - each bottle would cost $2 to produce. This investment requires an outlay of $10,000 in the end of May of next year. IRS rules prescribe this expenditure is depreciated using straight-line depreciation over the two years (=20 months). The squeezer will be sold in August at its book value. Suppose that the firm will sell again 1,000 bottles of lemonade in July and 2,000 bottles in August of next year. Each bottle will be sold for $6. All customers will pay for their purchases in August. Also suppose that the firm will pay half of the suppliers' bills immediately and another half in July. (i) What is the book value of the juice squeeze in August? What is the capital gains tax of selling this juice squeeze? What is the salvage value? (ii) What are the depreciation tax shields? (iii) What are the firm's free cash flows without the purchase of the juice squeezer and with the purchase? (iv) If the monthly discount rate is 10%, shall Sammie's Lemonade buy the juice squeezer (Hints: (i) use the NPV rule to make a decision whether to make a purchase; (ii) to calculate the squeezer's NPV use the incremental free cash flows, i.e. take the difference between the firm's free cash flows with and without the purchase of the squeezer. )? Question 2. Sammie's Lemonade is a small business that specializes in producing lemonade and selling it over the Internet. The firm opens only for few month around the summer time. This year Sammie's Lemonade was in business only in June, July, and August. In June, the firm bought all the required supplies for the production. The whole bill came up to be $12,000: half of it was paid immediately and another half in July. In total, the firm produced 3,000 bottles, meaning that the cost of one bottle was $4. All the production of lemonade happened in June, while the sales occurred in July and August. Sammie's Lemonade sold 1,000 bottles of lemonade in July and 2,000 bottles in August. Each bottle was sold for $6. All customers paid for their purchases in August. The corporate tax rate is 30%. For simplicity, assume that all the cash flows occur at the end of the month. (a) What is the change in net working capital in every month? (b) What is the firm's NOPAT in every month? (c) What is the firm's free cash flows in every month? (d) If the monthly discount rate is 10%, what is the net present value of the firm's FCFs in the end of June? (e) Sammie's Lemonade plans to renew its business next summer. In an attempt to improve the man- ufacturing process, the firm is considering whether to buy a new juice squeezer. This machine is not expected to affect the number of produce items, but rather the cost of producing - each bottle would cost $2 to produce. This investment requires an outlay of $10,000 in the end of May of next year. IRS rules prescribe this expenditure is depreciated using straight-line depreciation over the two years (=20 months). The squeezer will be sold in August at its book value. Suppose that the firm will sell again 1,000 bottles of lemonade in July and 2,000 bottles in August of next year. Each bottle will be sold for $6. All customers will pay for their purchases in August. Also suppose that the firm will pay half of the suppliers' bills immediately and another half in July. (i) What is the book value of the juice squeeze in August? What is the capital gains tax of selling this juice squeeze? What is the salvage value? (ii) What are the depreciation tax shields? (iii) What are the firm's free cash flows without the purchase of the juice squeezer and with the purchase? (iv) If the monthly discount rate is 10%, shall Sammie's Lemonade buy the juice squeezer (Hints: (i) use the NPV rule to make a decision whether to make a purchase; (ii) to calculate the squeezer's NPV use the incremental free cash flows, i.e. take the difference between the firm's free cash flows with and without the purchase of the squeezer. )