Sunshine in my Tummy Corp. manufactures and sells three major breakfast cereals: Fruity Crunch, Captain Shrapnel and Grandpas Granola. Fruity Crunch was first sold in 1966 and is the flagship product that made the company famous. The founder of the companys family loves Fruity Crunch and own 35% of the shares of the company. In 1987, the company introduced a new line cereal called Captain Shrapnel to compete with Captain Crunch. In 1998, the founders granddaughter wanted the company to offer a healthy alternative to the sugar laden products that made the company famous. The company introduced Grandpas Granola in the founders honor. Due to a new law that will be implemented in five years, the company will have to close all of its existing plants. The company will, in five years, have to decide if it wants to reinvest in new plants or sell the brand to someone. Your responsibility is to determine how to maximize the value of the companys operations over the next five years. Because of the company might discontinue operations in five years, the marketing budget etc. has been set so as to ensure that the same number of units will be sold over the next five years. This also means that no increases in the prices for any of the cereals is possible over the next five years; however, variable expenses are expected to increase with inflation which is estimated to be 3% a year for the next five years. The $15 million of fixed expenses are not expected to increase over the next five years. The Companys marginal tax rate is 20% and the companys weighted cost of capital or opportunity cost or discount rate is 10%. The Company looks at a 5 year payback requirement, IRR, NPV and Profit Index to make decisions. We have the following information from last year: 2 million units of Fruity Crunch were sold at an average price per unit of $4.00 and at a variable cost per unit of $3.50. 5 million units of Captain Shrapnel were sold at an average price per unit of $5.00 and at a variable cost per unit of $2.90. 1 million units of Grandpas Granola were sold at an average price per unit of $9.00 and at a variable cost per unit of $3.25. Each cereal has an exclusive factory that only produces that product. Last year, the Fruity Crunch factory was built for $5,000,000 with a 10 year linear amortization schedule. The factory can be sold at any time for 95% of book value. Three years ago, the Captain Shrapnel factory was upgraded for $2,000,000 with a 7 year linear amortization schedule. The factory can be sold at any time for 125% of book value. Four years ago, the new Grandpas Granola factory was built for $2,000,000 with a 7 year linear amortization schedule. The factory can be sold at any time for book value. All three factories will be sold at the end of the five years. If the sale price for a factory is zero the factory will be donated to a charity for free but any tax savings due to the donation is expected to equal the cost of decommissioning the factory so donated factories will have no impact on cash flows. Business Strategy 3: Bye Bye Breakfast Someone has offered the company $4.8 million for the Fruity Crunch factory that was built for $5 million last year. If you accept the offer you will have to discontinue the Fruity Crunch product. You will incur $500,000 in one-time expenses to close everything down associated with the Fruity Crunch product. You spent $200,000 to determine the impact of selling the factory. If you discontinue the Fruity Crunch product, Captain Shrapnel sold units are expected to increase by 10% this year and remain constant thereafter. Additionally, Grandpas Granola sold units would decrease by 3% this year and remain constant thereafter. Would you recommend the Bye Bye Breakfast business strategy? Why? Make sure to identify sunk costs in your write up. Safety Tip: Marginal deprecation needs to be included. Business Strategy 3 Sensitivity Testing: Bye Bye Breakfast The study performed for Strategy 3 ignored any impact to fixed costs. Also the marketing department thinks that the decrease in sales for Grandpas Granola could be more than 3%. The CFO wants to know how important are those assumptions. What do you tell the CFO?