Problems in Corporate Finance Paper

Cranfield Inc. Part I

Introduction

Cranfield Inc. is a leading producer of fresh, frozen, and made from concentrate cranberry drinks. The company purchases concentrates of apple, orange, cherry, and raspberry juices, and it processes a whole range of cranberry cocktails. Today its brands are sold throughout the U.S., with the cranapple cocktail being their most successful product. Currently Cranfield Inc.’s management is evaluating a potential new product, lite crapple cocktail. The assignment is to analyze the information on the new project and make a decision of whether or not the company should take on the new project.

Section I-Costs

The incremental cash flow is a cash flow that will occur if and only if the firm takes on a project (Brigham, 395). Interest Expenses should not be included in the cash flow statement because it is accounted for by discounting the cash flows (Brigham, 392). The $150,000 test marketing cost is a sunk cost and will not be included in the analysis. A sunk cost is a cash outlay that has already been incurred and cannot be recovered regardless of whether the project is accepted or rejected (Brigham, 395). The $25,000 annual lease payment is classified as an incremental cash flow because the cash flow is gained only if the Nantucket Cranberry Association does agree to lease the rental space. If Cranfield Inc. does not have an opportunity to lease the space to the Nantucket Cranberry association then Cranfield Inc. will incur an after-tax opportunity cost of $15,000 per year. An opportunity cost is the return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project (Brigham, 396). Cranfield Inc. is leasing a rental property for $25,000 a year but the cash inflow is taxed at 40%. After taxes are deducted from the payment $15,000 is remaining afterwards.

Cannibalization effect: The erosion of profits from regular cranapple sales should be charged to the...