Tasty Foods

What are the expected non-operating cash flows when the project is terminated in Year 10?

General speaking, WACC is the rate that a company’s shareholders expect to be paid on average to finance its assets, and it is the overall required return on the firm as a whole. Therefore, company directors often use WACC to determine whether a financial decision is feasible or not. In this case, I will choose 9.38% as discount rate. The reason why I choose 9.38% as discount rate is because the estimated Debt/Equity is 26% under the assumptions by CFO Sheila Dowling, which is most close to 25% of Debt/Equity from the projected WACC schedule. There might be some flaws existing by using WACC as discount rate. As we know, the cost of debt would be raised significantly as the leverage increased. The investment will definitely increase the firm’s current debt. So, the cost of debt would not keep at 7.75%.

1- The total unit cost = Total Variable Cost + Production Fixed Expenses + Advertising Expense + Selling and Administrative Expense = 3.23 + 1.20 + 0.30 + 0.19 = 4.92.

Test Market expenses – This is a sunk cost and thus should not be included

Then we can use the following formula to calculate the WACC. The cost of debt is taken to be on an after tax basis to further to account for the depreciation tax shield.

We assume that risk free rate (Rf) equals rate of long-term Treasury Bonds (as the project’s life is 10 years), so Rf = 9.5%.

First, we need to find the required rate of return (WACC) to calculate the discounted cash inflow so that we can evaluate the longwood woodyard project more accurately.

13. The marketing manager needs to know the cost of the research project before approving it. During which stage of the marketing research process would such a consideration most likely take place?

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

3. Repeat the Question 2 analysis, but now assume that the new marketing program is implemented.

I used WACC as the discount factor, we expect the rate of return to be higher than it, the same at least. The WACC reflects the average risk and overall capital structure of the entire firm [2]. It’s the required return and it presents how much the company pays for the capital it finances. In this case, the cost of equity is 10.33%, the cost of debt is 6.50%. I calculated WACC using those numbers and got a result of 8.49%.

See Table 1: Expected non-operating cash flow when the project is terminated at year 4 = 165,880$

The $320,000, on the other hand, is a fixed cost associated with the proposed addition.

The total amount of the costs which should be matched with Revenues for 2003 is $71,129. This is done by taking the capitalization amount shown above (217,520), dividing it by the 200,000 unit estimate, and multiplying it by the units that were sold in 2003. The calculation is shown below.

1. If you were in Steve Gasper’s place, would you argue to include the cost from market testing as a cash outflow?