Brief Introduction
Indian River Citrus Company is a leading producer of fresh, frozen, and made-from-concentrate citrus drinks. Currently, the company has three projects which are introduction of a new product known as lite orange juice; two mutually exclusive projects, Project S and Project L; and a fleet of delivery trucks with an engineering life of three years. All projects have its advantages and drawbacks. Hence, capital budgeting for each project is made for decision-making purpose.
Benefits and Drawbacks of each project
Project 1: Introduction of lite orange juice The advantage of lite orange juice is that there are currently no similar products in the market. Orange juice offered in the current market is high in calorie and results many consumers reluctant to drink it. However, lite orange juice is 35% lesser calories. This product is not offered in the current market yet, hence the company is in a strong position to monopolize the lesser calories orange juice market. Furthermore, the second advantage is that it will utilize the section of the main plant which has been unused for several years and causing some deterioration. The utilization of the unused section will also remove the rehabilitation expense. Besides that, used machinery that would be purchased is inexpensive, and it would be depreciated under the MARCS 3-year class, which is a special tax ruling. Lastly, lite orange juice would reduce regular orange juice production costs by $20,000 per year, on a pre-tax basis. However, the disadvantage is that it will cost more than the current orange juice. Moreover, it would also have an opportunity cost of $25,000 a year because it could lease the unused section of the main plant to other citrus. Furthermore, although the used machinery is inexpensive, but the shipping costs and installation charges are high, which accounted 12.28% of total