Heavenly Foods

HEAVENLY FOODS-Questions

1. Define the term “incremental cash flow.” Since the project will be financed in part by debt, should the cash flow statement include interest expenses? Explain.

2. Should the $262,500 test marketing cost be included in the analysis? Explain.

3. Suppose All Natural Foods, Inc. actually made a firm offer to lease the High Energy–Lite production site for $43,750 a year (beginning-of-year payments) for 20 years. How should that information be incorporated into the analysis?

4. If Heavenly Foods does not have an opportunity to lease the space, does this mean that the space is “free,” or costless, from the standpoint of the lite product project?

5. Should the erosion of profits from High Energy–Original sales be charged to the High Energy–Lite project? What if it were believed that if Heavenly Foods did not introduce the lite product, a competing firm would develop a very similar lite product, so that High Energy–Original sales would be adversely affected regardless of whether or not the project in question is accepted?

6. What is Heavenly Foods’ Year 0 net investment outlay on this project? What is the expected nonoperating cash flow when the project is terminated at Year 4? (Hint: Use Table 1 as a guide.)

7. Estimate the project’s operating cash flows including cannibalization effects but excluding consideration of the cash flows associated with use of the building. (Hint: Again, use Table 1 as a guide.) What are the project’s NPV, IRR, modified IRR (MIRR), accounting rate of return (ARR), and payback? Should the project be undertaken?

8. At this point in the analysis Abigail drew your attention to the fact that whereas you were using the market-determined nominal cost of capital as the discount rate, the sales price and operating cost per unit were assumed to remain constant throughout the project’s life. This raised the following questions:

a. What are the problems with...