Question

General Mills has been forced to develop new products to offer to an increasingly demanding market. Traditional cereals and packaged food products are not attractive to a more mobile and demanding consumer. Technology, health/diet awareness, and lifestyle have affected how and what consumers demand from the grocery store.

GM’s kitchens have developed a breakfast meal which is highly nutritious, can be heated in the microwave for 2 minutes, and can be consumed while driving because of its unique packaging design. It has test marketed the product and consumer feedback has been very positive.

• It will require an initial investment of $15M.
• Cash flows realized after all expenses are expected to be $1M each in the years 1, 2 and 3, $4M in years 4, 5, 6 and 7, and $2M in years 8, 9 and 10.
• All cash flows happen at the end of period. At year 10, the investment would be fully obsolete.

If the cost of capital is 12%, should the company proceed? What is the NPV and IRR? Show all you work.

Answer 1