Tasty Foods Case

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

Incremental Cash Flows are Free Cash Flows that a company can expect if they accept a new project. The cash flow statement should not include interest expenses. Later calculating NPV will involve interest expenses.

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

The $262,500 should not be included in the analysis, because this cost applies if we accept the project, and we do not know if that will be happening yet.

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?

The $43,750 should be treated as an opportunity cost, should we choose to not accept this project.

4. If Tasty 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?

The opportunity cost would be “free,” or costless, but the number of units produced would decline with fixed costs remaining the same, technically creating a loss.

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 Tasty 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?

Yes, the eroded profit from High Energy original sales needs to be accounted for when introducing the new High Energy-Lite project. The competing firm developing a similar Lite product is irrelevant, since it has nothing to do with whether or not we accept our own Lite project.

6. What is Tasty Foods’ Year 0 net investment outlay on...