Cranfield Case Essay

1316 Words Dec 6th, 2015 6 Pages
1. Incremental cash flows are ultimately the relevant cash flows to be used in project analysis. It is the difference between the cash flows the firm will have if it implements the project, and the cash flows the firm will have if it rejects the project. Although they are a cash expense, interest expenses are not included in project cash flows. We discount a projects cash flows by using its weighted average cost of capital (WACC), which already includes the cost of debt. Therefore, we do not include interest expenses in cash flows because it would essentially be counting them twice.

2. The $150,000 test marketing cost should not be included in the analysis because it is a sunk cost. A sunk cost is an outlay related to the project that
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7. Setting the project up in a time line would show an initial investment of 475,000 in year zero with cash flows of 170,700 in year one, 193,500 in year two, 136,500 in year three, and 166,300 in year four. The WACC for the project is 10%. With that all known, we can now compute the NPV, IRR, MIRR, and discounted payback. The NPV is equal to the cash flow in year 0 plus the sum of cash flows in years 1-4 divided by 1 plus the WACC raised to the year. For this project the NPV was 56,239. If NPV is greater than or equal to zero than the project can be accepted. IRR is computed in the same manner as NPV except we replace WACC with IRR in the formula. Using my financial calculator, the IRR was computed to be 15.48%. If the IRR is greater than or equal to the WACC we accept the project. For MIRR we must find the present value of cash inflows and the future value of cash outflows, then use the present value function on the financial calculator to solve for interest which equals the MIRR in this case. The MIRR was found to be 13.12%. If MIRR is greater than WACC we accept the project. For discounted payback we take the cash flows of each year and divide them by one plus the WACC raised to the year. Then we just continuously add the prior year discounted cash to the previous year to get our cumulative discounted cash flow. If last year cumulative discounted cash flow is greater than or equal to zero than we accept the project.

8. A. Inflation…

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