Which one should be chosen? Cash operating costs for the project total operating costs less depreciation are expected to total 60 percent of dollar sales. After several sessions, they concluded that there was little uncertainty in any of the estimates except for unit sales — cost and sales price estimates were fairly well defined, but unit sales could vary widely.
Since the waste-disposal choice has no impact on revenues, Lili and Brent think that the decision should be based on the relative costs of the two systems; these costs are set forth next in thousands of dollars. Keep in mind that anyone on the board might interrupt you with a probing question at any time, so be sure you understand the logic, and the weaknesses, behind every technique you use and every statement you make.
Lili and Brent also determined that the T-bond rate, which they use as the risk- free rate, is 8 percent, and that the market risk premium is 6 percent. The new product would cost more, but it would offer consumers something that no other competing orange juice product offers—35 percent less calories.
Content Indian River Citrus Company is a leading producer of fresh, frozen, and made-from-concentrate citrus drinks. Specifically, the sales manager estimated that regular orange juice sales would fall by 5 percent if lite orange juice were introduced.
Once we have the figures and they have been entered in the time line, we can easily calculate the various indicators such as payback period, IRR or NPV. Should this cost be reflected in the analysis?
Indian River is also evaluating two different systems for disposing of wastes associated with another product, frozen grapefruit juice. We make our time line with the calculated figures as below 0 1 2 3 4 The product being considered is fresh lemon juice.
The Year 0 costs represent the capital outlays. In particular, the executive committee wanted to see some type of risk analysis on the project — it appeared to be profitable, but what were the chances that it might nevertheless turn out to be a loser, and how should risk be analyzed and worked into the decision process?
Both systems have an estimated 3-year life, but the one selected will probably be repeated at the end of its life into the foreseeable future. Solution Summary The solution goes into a great amount of detail regarding the question being asked.
Prepare a sales budget for the first quarter of Allied has a standard form that is used in the capital budgeting process; see Table IC Overall, an excellent response to the question being asked.
The discussion with Courtland raised another issue: Given this fact, should the projected cash flows be revised to show projected interest charges? Overhead costs are incurred almost entirely in the mixing and bottling process. Plan W requires more workers but less capital, while Plan C requires more capital but fewer workers.
Draw a time line that shows when the net cash inflows and outflows will occur, and explain how the time line can be used to help structure the analysis. When Lili and Brent asked about the basis for the 3 percentage point adjustment, Courtland stated that the adjustment apparently had no basis except the subjective judgment of John Gerber, a former director of capital budgeting who was no longer with the company.
As a bonus, he asked me if changes in the cost of capital would ever create a change in the IRR ranking of these two projects. To guide you in your analysis, your boss gave you the following set of questions.
The section of the main plant where the lite orange juice production would occur has been unused for several years, and consequently it has suffered some deterioration. Brent believes that this outlay, which has already been paid and expensed for tax purposes, should be charged to the lite orange juice project.Risk Analysis in Capital Budgeting Decisions This case focuses on capital budgeting risk assessment using the lite cranberry juice project that was introduced in Case 12A, Cranfield.
In this training also explains about analyzing risk in capital budgeting is often the case in practice. OBJECTIVE. After this training, participants will be able to analyzing the project cash flow, able to assess the project appraisal methods that exist, and capable to assess the project’s risk.
Zerif Lite developed by ThemeIsle. Capital Budgeting and Cash Flow Estimation After seeing Snapple’s success with noncola soft drinks and learning of Coke’s and Pepsi’s interest, Allied Food Products has decided to consider an expansion of its own in the fruit juice business.
The product being considered is fresh lemon juice. Students will examine and discuss factors related to capital budgeting and analysis tools used to determine which project is worth the killarney10mile.come and discuss the capital budgeting process within a manufacturing organizationExamine and discus.
Case Indian River Citrus killarney10mile.coming. Explore. Explore Scribd Bestsellers. Explore by Interests. Case Indian River Citrus killarney10mile.coming.
Uploaded by NipunSahrawat. Related Interests. Capital Budgeting; Indian River’s management is currently evaluating a new product—lite orange juice. Studies. CASE13E Instructor Model 05/12/93 INDIAN RIVER CITRUS COMPANY (B) Risk Analysis in Capital Budgeting This case focuses on capital budgeting risk assessment using the lite orange juice project that was introduced in Case 12, Indian River Citrus Company (A).
The model develops incremental cash flow estimates, and then calculates NPV, IRR, MIRR, and Payback for the lite orange juice project%(12).Download