Tasty Foods

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  • Topic: Net present value, Cash flow, Internal rate of return
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  • Published : March 15, 2011
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Tasty Foods
Case Summary (Roxana):
Tasty Foods Corporation was founded in 1995 by Henry Abercrombie. The corporation is a food conglomerate that has major product lines including cereals, frozen dinners, canned sodas and fruit juices. Abercrombie founded the company with a small inheritance and with the idea of producing instant hot cereal. The firm’s hot cereal proved to be a success and was well accepted by the consumers. Over the years it grew by its acquisitions and product innovation ideas, expanding considerably over the last 40 years. In addition, Abercrombie proved to be an excellence business person that had a lot of vision and was very business-savvy. When Abercrombie’s health started deteriorating, he decided to hire his daughter, Abigail Abercrombie, with plans to have her succeed him eventually as president of the company. Abigail, a Harvard MBA graduate, was hired as a management trainee. She has her own vision about the future of the company which includes introducing new product lines aimed at the athletically-inclined and health-conscious population, in order to maintain the company’s market position. Since the company’s financial position is still strong, Abigail believes it is the perfect time to enter this market because of recent trends towards healthy lifestyles, especially for low fat and low sodium products and high energy drinks. She firmly believes that the company must follow these trends to avoid losing revenues and market position. For these reasons Abigail and the Marketing and Development departments decide to launch a new athletic drink called “High Energy”. After it was developed they found that it contained 5 grams of fat per 8 ounce serving. Considering this value to be high for the target market and realizing it was late in the game to redo the formula, it was decided to launch a “lite” version of the energy drink after an acceptable market share was established. The new “lite” version would contain less calories and less fat. The high energy drink gained small market acceptance in almost two (2) years. After completing a market research that provide the product to be acceptable with 50% less calories and 2 grams of fat per eight ounces, it was decided to start developing the high energy “lite” version that would also provide a foothold in other market sectors such as frozen dinners. To do this they would take advantage of their “lite” drink procedures and develop a “lite” line of frozen pizzas. The new “lite” version of high energy drink was twice as expensive as the regular energy drink. She has asked Group 4 Consulting LLC to analyze the project in order to present finding to Tasty Foods’ Executive Committee. The following financial data was utilized as par of the evaluation.

Marketing Cost| $265,500|
Used Equipment Price| $700,000 |
Expected life| 4 years|
Depreciation| MARCs (.33, .45, .15, and .07) (Yrs 1 to 4)| Shipping| $35,000|
Installation| $70,000|
Inventories (increase)| $30,000 (at initial investment)|
Salvage Value (equipment)| $87,500 (after 4 yrs use)|
Price| $2.00 per carton|
Fixed Cost| $190,000|
Variable Cash Operating Cost| $1.25 per unit|
Sales estimated fall due to Cannibalization on High Energy Original if High Energy Lite introduced| 30%| Lower Sales| $80,000 (per year)|
Reduce production cost| $35,000 (per year pre-tax)|
Net Pre-tax Cannibalization effect| -$80,000 + $35,000 = -$45,000| Tax Rate| 40%|
WACC| 12%|
Possible Lease of space| $43,750 for 20 yrs|
Possible Rent of Coca Cola Space for the Lite Product| (almost no capital would have to be invested in the project if rented)| VP Production concern:| Space will be needed in 2 to 3 yrs assuming normal growth in sales of products| Inflation| 4%|

Case Questions
Question No. 1 (Omar): Define the term “incremental cash flow”. Since the project will be financed in part by debt, should the cash flow statement...
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