Indian River Citrus Company (a)

1653 Words Jan 17th, 2014 7 Pages
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
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On the other hand, when the sales price increases by 2% and costs increase by 5% per year, NPV decreases to -$49,200.

This results shows that, a high increase in cost inflation rate, but a slightly change in price inflation give a negative impacts toward the project’s NPV, IRR, MIRR, and Payback Period. However, if the increase of price inflation is greater than or equal to the cost inflation, it gives positive impact towards the project. The best example is when the price inflation increases by 5% and cost inflation by 2%, we can see a huge gap increases in the project’s NPV by $142,999, IRR and MIRR increases by 10.3% and 6.1%, and the project can get its initial cost back half a year earlier.

For Project 2, the table below shows the Net Present Value for Project S and Project L using EAA Approach and Single Cycle Approach:

NPV | EAA Approach | Single Cycle | Project S | $ 7,547.30 | $ 4,132.23 | Project L | $ 6,190.49 | $ 6,190.49 |

It seems that two conflicting results here using EAA approach and single cycle method. However, we should using EAA Approach only as two projects with different time periods cannot be compared with each other