Healthy Foods is a company that produces canned soups made without preservatives. The firm has assets that have a book value of

$100 million. The assets are five years old and have been depreciated

$50 million over that period. In addition, the inflation rate over those five years has averaged 2% a year. The assets are currently earning $15 million in after-tax operating income. They have a remaining life of 10 years, and the depreciation each year is expected to be $5 million. At the end of these 10 years, the assets will have an expected salvage value, in current dollars, of $50 million.

a. Estimate the CFROI of Healthy Foods, using the conventional CFROI approach.

b. Estimate the CFROI of Healthy Foods, using the economic depreciation approach.

c. If Healthy Foods has a cost of capital in nominal terms of 10% and the expected inflation rate is 2%, evaluate whether Healthy Foods’
existing investments are value-creating or value-destroying.