60 heavenly foods corporation

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Case 60H Student Version 9/21/96

HEAVENLY FOODS CORPORATION

Capital Budgeting Methods, Cash Flow Estimation, and Risk Analysis

This case combines capital budgeting decision methods, cash flow estimation, and risk analysis

which are presented in Cases 12I and 13I. In addition, the case focuses on quantifying the

strategic option value of developing the new line of lite frozen pizzas.

The model develops incremental cash flow estimates, then calculates NPV, IRR, MIRR, ARR, and

payback for the lite athletic drink project. Also, this model contains a graph which can be used to

plot the sensitivity diagrams. You can change the data tables, then use them to change the graph.

Click on the tab labelled 'HEAVENLY' to view the graph. In addition, the option value of the lite

pizza project is determined. If you are using the student version of the model, some of the cells have

been blanked out. Before using the model, it is necessary to fill in the empty cells with the

appropriate formulas. Once this is done, the model is ready for use.

All labels have been kept; all formulas have been deleted.

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Tax rate

Cost of Capital

Cannibalization of Other Projects:

Revenue Loss $80,000

Cost Reduction $35,000

Net Cannibalization $45,000

Black-Scholes Option Valuation: Strategic Opt. Value

Lite Pizza Project:

Yr. 1 Outlay

Yr. 2 CF

Yr. 3 CF

Yr. 4 CF

Av. Cost of Cap.

Risk-Adj. COC 15%

Black-Scholes Model Inputs

Current price P =

Exercise price X =

Risk-free rate of interest r =

Time to expiration t =

Variance of stock returns s^2 =

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|::

MODEL-GENERATED DATA: HEAVENLY FOODS CORPORATION

Net Investment Outlay: Depreciation Schedule: Basis:

Equipment cost MACRS Dep. End of Year

Freight Year Factor Expense Book Value

Installation ------ ------ -------- --------

Change in NWC 1

2

3

4

Cash Flows: Year Year Year Year Year

0 1 2 3 4

-------- -------- -------- -------- --------

Unit price

Unit sales

Revenues

Fixed operating costs

Variable operating costs

Total operating costs



Termination CF

Project NCF

Decision Measures: Cumulative Cash Flows:

NPV 0

IRR 1

TV 2

MIRR 3

ARR 4

Payback years



|::

Scenario Analysis:

Scenario Prob. NPV IRR MIRR ARR

-------- ----- --------- ----- ----- -----

Worst

Base

Best

Expected value

Standard deviation

Coeff. variation

Data Tables for Sensitivity Analysis

1. Unit Sales:

Units: NPV: IRR: MIRR: ARR: Payback:

Deviation 0 0 0 0 0

-0.3 490,000

-0.2 560,000

-0.1 630,000

0 700,000

0.1 770,000

0.2 840,000

0.3 910,000



-0.3 61,250

-0.2 70,000

-0.1 78,750

0 87,500

0.1 96,250

0.2 105,000

0.3 113,750

4. Variable Cost:

VC per

Unit: NPV: IRR: MIRR: ARR: Payback:

Deviation 0 0 0 0 0

-0.3 0.88

-0.2 1.00

-0.1 1.13

0 1.25

0.1 1.38

0.2 1.50

0.3 1.63

5. Cost of Capital:

WACC: NPV: IRR: MIRR: ARR: Payback:

Deviation 0 0 0 0 0

-0.3 8.4%

-0.2 9.6%



5%

6%

7%

8%



1.45 0.42643

1.50 0.43315

1.55 0.43939

1.60 0.44516

1.65 0.45049

1.70 0.4554

1.75 0.45991

1.80 0.46404

1.85 0.46782

1.90 0.47126

1.95 0.47439

2.00 0.47723

2.05 0.4798

2.10 0.48212

2.15 0.4842

2.20 0.48608

2.25 0.48776

2.30 0.48926

2.35 0.4906

2.40 0.49179

2.45 0.49285

2.50 0.49378

2.55 0.49461

2.60 0.49533

2.65 0.49597

2.70 0.49653



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END



HEAVENLY

$0

$0

$0

$1

$1

$1

$1

-0.3 -0.2 -0.1 0 0.1 0.2 0.3

N P V

% DEVIATION FROM EXPECTED VALUE

SENSITIVITY ANALYSIS

Units Price Salvage VC/Unit wacc

60 heavenly foods corporation

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