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Homework answers / question archive / Aussie Growers Company is considering the introduction of a new range of organic cold-pressed gourmet juices that will be distributed through high-end food retailers such as David Jones’ Food Halls

Aussie Growers Company is considering the introduction of a new range of organic cold-pressed gourmet juices that will be distributed through high-end food retailers such as David Jones’ Food Halls

Accounting

Aussie Growers Company is considering the introduction of a new range of organic cold-pressed gourmet juices that will be distributed through high-end food retailers such as David Jones’ Food Halls. This would enable the company to use its surplus fruit production that is currently going to waste. They hope to capture new consumers who are concerned with leading a healthy life and who want the convenience of fruit drinks.

The project requires Aussie Growers Company to purchase a new industrial juicing machine and although this represents a large capital expenditure today, the project cannot proceed without it. The machine cost $990,000 plus it would need to be installed into the factory at a further cost of $150,000. Over the last year, Aussie Growers Company has spent $120,000 in research and development relating to juicing machines that extract maximum fruit pulp from whole fruits.

The equipment is very large and would require that the company expand into the industrial unit next door. The unit was purchased 4 years ago for $350,000 and is currently rented out to Premier Pet Food. Next year’s rent had already been set at $120,000. Given the current rental market in Australia, the annual rent thereafter was anticipated to decrease by 3% p.a. The juice project would require the immediate cancellation of this agreement which Aussie Grower Company is able to do without penalty.

The company also needs to borrow $850,000 today to help finance the project, which includes a new advertising campaign. The five-year interest-only loan has a fixed interest rate of 3.2% p.a. for commercial borrowings, which equates to $27,200 each year. The advertising campaign will cost the company $750,000 today and then they will maintain it at 6.5% of their total anticipated revenues for each year of this product in order to penetrate the juice market and then to maintain their market share. The company’s tax accountant has advised that advertising can be claimed as a tax deduction at the time the expense is incurred.

Aussie Growers Company will sell each 1.5 litre juice bottle for $8.99. Each bottle requires approximately two kilos of fresh fruit. The variable costs per bottle are $1.90. The project would require the company to employ an additional five full-time workers at a cost of $50,000 p.a. each in the first year. The company has an enterprise agreement in place with their employees that would result in these wages increasing by 2.5% p.a. for the life of the project. Other annual fixed costs will be $95,000 in the first year but these are predicted to grow by 8% p.a. Aussie Growers Company commissioned Traffic Brand Agency to conduct a marketing study into the number of proposed juice customers and overall size of the fruit juice market. This study cost Aussie Growers Company $350,000 one month ago. The predicted sales units are:

Sales Units

Year 1: 170,000

Year 2: 200,000

Year 3: 265,000

Year 4: 225,000

Year 5: 180,000

Currently, the product lines of Aussie Growers Company include the sale of freshly prepared and prepackaged fruit salad. It is anticipated that 22% of their juice sales (in units) will come from customers who would have otherwise purchased the fruit salad product for $7 per container. They anticipate that this rate and price would remain constant for the next five years.

The juicing project will require an initial increase in inventories and accounts receivables by $50,000 to get production started. The total investment in net working capital will need to be maintained at 15% of the dollar value of sales for that year. All working capital will be liquidated at the termination of the project after five years as it is replaced by new juicing techniques that dissolve the fruit pulp into edible capsules.

The Australian Taxation Office has ruled that the equipment will have an estimated useful life of ten years, over which the installed cost of the machine must be depreciated to zero. The juicing machine is expected to be sold to Juice and Co. for $650,000 at the end of the project’s life. The applicable company tax rate for Aussie Growers Company is 30%.

If the Board of Directors approves of the juicing project, they will commit to a special one-off dividend amounting to $750,000 for all shareholders at the end of the project’s life in anticipation of its success.

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