Capital Budgeting Method and Cash Flows Estimation

3155 WordsApr 13, 201313 Pages
Capital Budgeting Methods and Cash Flow Estimation Tasty Foods Corporation (Part A) November 5, 2012 Executive Summary: Tasty Foods has seen phenomenal growth throughout its lifetime in large part due to a continuous development of innovative new products. Although prosperous for Tasty Foods from its birth, this is a business initiative that in the past years, Tasty Foods has not maintained. Consumers are shifting towards a more health conscious lifestyle and until now Tasty Foods has not presented any new products to capture this segment of the market. Abigail developed a product called High Energy to target the health conscious and athletic consumer without taking into account the high fat content per serving. To amend this…show more content…
This cost is considered sunk cost, and incurred independent of High Energy-Lite approval. We will disregard when estimating project’s future cash flows. * We estimated the initial cash outlay to be $835,000. This represents the initial investment your company has to make to undertake this project. * A base case scenario (Exhibit 1) that excludes inflation is available. However, in additional analysis we incorporated neutral inflation of 4% as well as assigned different inflation rates to selling price and variable costs (Exhibits 3, 4, 5). Excluding inflation in capital budgeting analysis will cause the estimated NPV to be lower than the true NPV for the project. Our final case assumes a neutral inflation of 4% for Sales Price and 2% for Variable Costs. * Keeping in mind the effect that High Energy-Lite will have on the original energy drink, we included the $45,000 net pre-tax, sales lost by the High Energy-Original in our analysis. This cannibalization cost is relevant to the projects cash flows, and as such it helps determine true project cash flows. Even though sales of the new “lite” drink decrease the original drink sales, we feel this is an important step for Tasty Foods. This will enable the company to reach a new demographic, the health conscious consumer. Analysis: High Energy has been on the market for only eighteen months and enjoys a small but loyal following. Studies indicate that High Energy would receive a much larger market

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