Cranfield Inc

Topics: Net present value, Cash flow, Internal rate of return Pages: 3 (943 words) Published: August 20, 2012
Cranfield Inc. is a leading producer of juices for range of cranberry cocktails. After a market research experiment Cranfield Inc. has many different business decisions to make. One to introduce a new line called lite cocktail which requires space and machinery and will eat into sales of currently offered products. Or not to introduce the new product and lease out it’s space, or do nothing to save the space until it’s needed for its current product line. 1) Incremental cash flows are the cash flows that should be used in calculating the NPV of a project. The cash flows are changes in cash flows that occur as a direct consequence of accepting a project, not the cash flows that the company is already receiving. No we do not include interest expense in the capital budging process, because any increase in interest expense related to the firms decision regarded on how to finance the project is a separate decision. Capital budging using incremental cash flow is a decision method of evaluating earnings based on the project outcome and any adjustments for debt financing should be reflected in the discount rate. 2) No, the 150,000$ marketing test expense should not be included in the analysis because it is a sunk cost. 3) If the Cranberry Association did make an offer to lease the site for 25,000$ a year for 20 years then the analysis should take into account this. Assuming no risk of default on Cranberry Association, Cranfield should discount future cash flows as an annuity using WACC as a discount rate to find the present value of the offering. Thus, if Cranfield’s own project has a lower NPV then Cranberry Association offer, it should accept the offer to lease the site from Cranberry Association. 4) If Cranfield is not able to lease the space to either the Cranberry Association or Coca-Cola it still has a cost associated with it. This cost should be incorporated into the cost of the project for the lite cocktail, as an opportunity cost associated...
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