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To capitalize on consumers concerns about healthful food, Family Friendly Foods, Inc. is considering a new cereal, Veggie Crisp, which contains small bits of cooked
To capitalize on consumers concerns about healthful food, Family Friendly Foods, Inc. is considering a new cereal, Veggie Crisp, which contains small bits of cooked vegetables with bran flakes. As part of its cash flow analysis, the Finance Department has made the following forecasts of demand and costs:
- 1) Sales Revenue for Year One will be $200,000 and for Year Two will be $1,000,000. Sales revenue will then increase by 15% per year for Years 3, 4, 5, and 6. Sales in Year 7 will remain at the same level as in Year 6. In Years 8, 9, and 10, sales revenue will decline by 15% per year. At the conclusion of Year 10, the project will be terminated.
- 2) Cost of Goods Sold (COGS) will be 60% of Sales Revenue.
- 3) Advertising and General Expenses will be $10,000 per year.
- 4) Equipment will be purchased at t = 0 for $1,250,000 and will be depreciated over the 10-year project life, using the straight-line depreciation method. Installation Cost at t = 0 is $25,000 and this cost will be depreciated over 5 years, also using the straight-line depreciation method. The equipment has no salvage value.
- 5) Other Initial Costs of $875,000 will be expensed in Year One of the project, as these costs are not depreciable. They apply only to Year One of the analysis and are for such items as product formulation and revision, and taste testing panels, etc.
- 6) A 21% Income Tax Rate is applicable.
- 7) Family Friendly Foods, Inc. has a 10% Weighted Average Cost of Capital (WACC).
Please answer the following questions:
- What is the total initial investment at t = 0 for the Veggie Crisp Cereal project?
- Calculate the Net Income and the Operating Cash Flow for Years 110 of the Veggie Crisp Cereal project.
- Calculate the Net Present Value (NPV) for this project, using the firms 10% WACC:
- If you were the Manager of the Finance Department at Family Friendly Foods, Inc., would you recommend that the firm proceed with the Veggie Crisp Cereal project? Why or why not?
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