Moonbucks Coffee Corp. is contemplating two new long-term drink products that will require addition to fixed...

Moonbucks Coffee Corp. is contemplating two new long-term drink products that will require addition to fixed assets in their coffee shops. See table below. Calculate the NPV, IRR and payback period (without discounting) of the two products. For these similarly risky projects the WACC is 10%. All FCF projections in dollars.

MoonBucks Coffee. Capital Budgeting Analysis. Long Term Drinks Introductions.

Free Cash Flow Profiles	Yr 0	Yr 1	Yr 2	Yr 3	Yr 4
Scratch Made Iced Tea	$(200)	$40	$60	$90	$120
Coffee Slushie	$(150)	$60	$80	$100	$110

a)What are Project NPV’s?

b)What are Payback Periods (without discounting)?

c)Which product line should be accepted assuming these are mutually exclusive projects?

d)What is the preferred method for judging acceptance of one project over the other?

Solutions

Expert Solution

(C)If the product lines are mutually exclusive then Coffee slushie product line should be accepted because it has higher NPV and lower payback period than other product line .

(D)For judging one project over the other ,NPV i e, Net present value is the most preferred method because it considers time value of money unlike Payback period and also it is an absolute measure which tells us how much value a project is going to add to the firm

jeff jeffy answered 1 year ago

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