Indian River Citrus Company

Indian River Citrus Company

Capital Budgeting Analysis

Prepared for: Matthew Stewart, President

Senekah B. LaJaunie

Junior Analyst, Constand Consulting

August 2, 2010

Executive Summary

Indian River Citrus Company is a leading producer of fresh, frozen, and made-from-concentrate citrus drinks. Indian River’s management is currently evaluating a new product – lite orange juice. The new product would cost more, but it would offer consumers something that no other competing orange juice product offers – 35 percent less calories. Indian River contacted Constand Consulting to analyze this project, along with two other potential investments, and then present the findings to the company’s executive committee.

Section I of this report establishes some base information for the analysis, and also discusses the cash flow considerations. One of the items addressed in this section is the $100,000 previously spent to rehabilitate the plant. This cost cannot be attached to this project as it is a sunk cost. Also discussed in this section is the $70,000 termination cash flow, shown in Appendix C that will result in terminating the project at the end of the four years.

Section II of the report discusses the important factors for considering the lite orange juice project such as the net present value (NPV), internal rate of return (IRR), and the payback period. The initial analysis shows that this project will have an NPV of $23,720, an IRR of 11.9 percent, and a payback of 3.1 years. Section III will discuss the effects of inflation on these factors.

Section IV of this report begins to discuss project comparisons. The analysis in this section will show that when comparing two mutually exclusive projects, S and L, there are two approaches: replacement chain and equivalent annual annuity. Through both the replacement chain and equivalent annual annuity approach Project L was determined to be of better value. In section V the affects of inflation and...