Cranfield Case Essay

1303 Words Feb 14th, 2016 6 Pages
1. Incremental cash flows are ultimately the relevant cash flows to be used in project analysis. It is the difference between the cash flows the firm will have if it implements the project, and the cash flows the firm will have if it rejects the project. Although they are a cash expense, interest expenses are not included in project cash flows. We discount a projects cash flows by using its weighted average cost of capital (WACC), which already includes the cost of debt. Therefore, we do not include interest expenses in cash flows because it would essentially be counting them twice.

2. The $150,000 test marketing cost should not be included in the analysis because it is a sunk cost. A sunk cost is an outlay related to the project that
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However, the space may not technically be free or costless as there could be some maintenance and utility expenses that Cranfield is incurring from the space. Not using the space could incur these expenses further without getting any sort of profit back from it. None of this is mentioned in the case study, so on that basis I will assume that it is free and costless as mentioned earlier.

5. The cannibalization of the profits of regular cranapple sales must be included in the analysis. This an example of a negative within-firm externality and it gets charged as an expense because it is technically lost cash flows. Management of Cranfield would have to use careful thinking and good judgement when analyzing this negative externality. If they choose not to make the lite product because of the cannibalization, then it opens the door for another firm to create the product and steal sales. The textbook sites IBM’s decision in the 1970’s to shift away from the PC business over fears of it hurting their mainframe business. That was obviously a huge mistake and acts as an example of why financial analysis can only take a firm so far. They must understand the industry and long run consequences of any given decision.

6.The Year 0 net investment outlay for the project is $-475,000. This computed by adding the price of the machinery, installation, shipping, and the change in net working capital. The non-operating cash flow when the project is…

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