You will make a recommendation with supporting analysis as to which business strategy, if any, to select.

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Question:

You will make a recommendation with supporting analysis as to which business strategy, if any, to select. You will first be given a Case Study and then asked to make a recommendation to accept or reject each of the five business strategies described below.

Deliverables:

This is an individual assignment, but you will be expected to have two people peer review your work. Your calculations and projections should be in excel as well as your recommendation about each business strategy. Submit your Excel file with your calculations and write up on D2L. Make sure to label your files "Project 2_your name." You will have your rough draft peer reviewed and have your work reviewed by me (bring a laptop or other way to edit your paper in class).

Safety Tip: This project is designed to measure three things - Can you build the correct MARGINAL cash flows? Can you calculate the profit metrics correctly? And finally, based on the information you have (with some common sense speculation), can you reach a sound business recommendation?I would expect that you would have an excel file with at least six tabs--one for each Business Strategy (Strategy 3 and 5 may need more than one tab). The top of each tab would have the cash flow calculations. This would be followed by the profit metric calculations and then at the bottom of each tab would be your recommendation about that business strategy. (At the end is a suggestion on how to structure the tab)

Case Study:Breakfast Hunch

Sunshine in my Tummy Corp. manufactures and sells three major breakfast cereals: Fruity Crunch, Captain Shrapnel and Grandpa's Granola. Fruity Crunch was first sold in 1966 and is the flagship product that made the company famous. The founder of the company's family loves Fruity Crunch and own 35% of the shares of the company.In 1987, the company introduced a new line cereal called Captain Shrapnel to compete with Captain Crunch.In 1998, the founder's granddaughter wanted the company to offer a healthy alternative to the sugar laden products that made the company famous.The company introduced Grandpa's Granola in the founder's honor.

Due to a new law that will be implemented in five years, the company will have to close all of its existing plants. The company will, in five years, have to decide if it wants to reinvest in new plants or sell the brand to someone. Your responsibility is to determine how to maximize the value of the company's operations over the next five years.

Because the company might discontinue operations in five years, the marketing budget etc. has been set so as to ensure that the same number of units will be sold over the next five years. This also means that no increases in the prices for any of the cereals is possible over the next five years; however, variable expenses are expected to increase with inflation which is estimated to be 3% a year for the next five years. The $15 million of fixed expenses are not expected to increase over the next five years. The Company's marginal tax rate is 20% and

the company's weighted cost of capital or opportunity cost or discount rate is 10%. The Company looks at a 4 year payback requirement, IRR, NPV and Profit Index to make decisions.

We have the following information from last year:

2 million units of Fruity Crunch were sold at an average price per unit of $4.00 and at a variable cost per unit of $3.50.

5 million units of Captain Shrapnel were sold at an average price per unit of $5.00 and at a variable cost per unit of $2.90.

1 million units of Grandpa's Granola were sold at an average price per unit of $9.00 and at a variable cost per unit of $3.25.

Each cereal has an exclusive factory that only produces that product.

Last year, the Fruity Crunch factory was built for $5,000,000 with a 10 year linear amortization schedule. The factory can be sold at any time for 95% of book value.

Three years ago, the Captain Shrapnel factory was upgraded for $2,000,000 with a 7 year linear amortization schedule. The factory can be sold at any time for 125% of book value.

Four years ago, the Grandpa's Granola factory was built for $2,000,000 with a 7 year linear amortization schedule. The factory can be sold at any time for book value.

All three factories will be sold at the end of the five years. If the sale price for a factory is zero the factory will be donated to a charity for free but any tax savings due to the donation is expected to equal the cost of decommissioning the factory so donated factories will have no impact on cash flows.

Business Strategy 4: Mad Men for Breakfast

Should the company increase the marketing budget by $500,000 a year? The fixed expense for each of the next five years would increase by $500,000...The marketing campaign funded by this increase in costs is expected to have the following results:

2 million units of Fruity Crunch sold last year would increase by 150,000 units per year for three years and then decrease by 100,000 units per year for two years.
5 million units of Captain Shrapnel sold last year would increase by 100,000 units per year for two years and then remain constant.

1 million units of Grandpa's Granola sold last year would increase by 10,000 units per year for two years and then remain constant.

Would you recommend the Mad Men for Breakfast Strategy? Why?