Northern Forest Products
Garbage-in, Garbage-out
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 this project? What is the expected non-operating cash flow when the project is terminated at Year 4? (Hint: Use Table 1 as a guide.)
Year 0 net investment outlay = 835,000
Expected non-operating cash flow when the project is terminated at Year 4
Salvage Value= 87,500
Salvage Value Tax= 35,000
Recovery of NWC= 30,000
Termination CF= 82,500
7. Estimate the project’s operating cash flows including cannibalization effects but
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 this project? What is the expected non-operating cash flow when the project is terminated at Year 4? (Hint: Use Table 1 as a guide.)
Year 0 net investment outlay = 835,000
Expected non-operating cash flow when the project is terminated at Year 4
Salvage Value= 87,500
Salvage Value Tax= 35,000
Recovery of NWC= 30,000
Termination CF= 82,500
7. Estimate the project’s operating cash flows including cannibalization effects but