Question
Royal Bread Co. makes specialty pastry products for athletic events. The product manager has identified two investment options to expand into other food options for
Royal Bread Co. makes specialty pastry products for athletic events. The product manager has identified two investment options to expand into other food options for athletic events. The following table presents financial information regarding these two proposals:
Proposal 1 Garlic Fries | Proposal 2 Self Topped FY | |
Initial Cash Only | 8,200,000 | 9,000,000 |
Net cash inflows- year 1 | 4,750,000 | 1,000,000 |
Net cash inflows- year 2 | 3,250,000 | 1,200,000 |
Net cash inflows- year 3 | 2,000,000 | 2,900,000 |
Net cash inflows- year 4 | 700,000 | 4,500,000 |
Net cash inflows- year 5 | 250,000 | 5,500,000 |
The salvage value is expected to be zero for both proposals at the end of five years. The company uses a discount rate (i.e., required rate of return) of 10% for such investment options. Ignore income taxes.
Part a. Calculate the net present value for each proposal. Which project is preferable based on this analysis? Why?
Part b. Calculate the payback period for each proposal. Which project is preferable based on this analysis? Discuss. Part c. Royal Bread Co. has allocated $10,000,000 to pursue new investment opportunities. What project would you recommend to the CEO of Royal Bread Co.? What other factors should the CEO consider? Discuss your reasoning behind your recommendation.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started