Determine the optimal capital budget

Reference no: EM132644480

Problem 1: Apply capital budgeting decision criteria and determine the optimal capital budget.

CAPITAL BUDGETING CASE FINANCE 3780

Illinois Cereal Company currently produces cereal targeted to consumers over 40 years of age. Sales have steadily declined over the last 10 years resulting in a decision to shut down the manufacturing plant. The plant was built 40 years ago at a cost of $28, 000, 000 and is now fully depreciated. A rival cereal company has offered to purchase the existing facility for $15,000,000 in as is condition. The Vice President in charge of the plant has developed an alternative to closing the plant.

The Vice President has proposed using the existing plant to manufacture wheat flakes, corn flakes, and rice flakes targeted to consumers under 10 years of age. The VP estimates sales of wheat flakes to be 400,000 cases in the first year, 630,000 cases in the second year, and to escalate at 4% for years 3, 4, and 5 and at 3% annually thereafter. Sales of corn flakes are estimated at 500,000 cases in the first year, 810,000 cases in the second year, and to increase at 3% for years 3,4 and 5 and at 2% annually thereafter. Rice flakes will not be produced until the third year. Sales of rice flakes are estimated at 210,000 cases in year three, 340,000 cases in year four and to increase at 5% for years 5,6, and 7 and at 2% annually thereafter. The sales price of wheat flakes will be $110 per case in year one, $130 per case in year two, and will increase 4% annually

Reference no: EM132644480

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