Capital Budgeting Methods and Cash Flow Estimation
Tasty Foods Corporation (Part A)
Tasty Foods Corporation is a food conglomerate with major product lines of cereals, frozen dinners, and canned sodas and fruit juices. The firm was founded in 1955 by Henry Abercrombie, an ambitious college graduate who had just acquired a small inheritance and who wanted to be his own boss. Equipped with an idea for an instant hot cereal, Henry founded Tasty Foods. The instant hot cereal was well received by the public, and through Henry’s industriousness, his superior ideas, and his excellent business instincts, the company expanded considerably during its 40-plus years of existence, both by acquisitions and innovative product ideas. Three years ago, because of his age and declining health, Henry hired his daughter, Abigail, as a management trainee with the intention that she would eventually succeed him as president of the company.
Abigail, a Harvard MBA graduate and an amateur marathon runner, has a number of new product ideas she would like the company to introduce. She believes Tasty Foods has not stayed current with general food trends, especially the trend toward low fat and low sodium content products and the introduction of athletic drinks to replace essential body fluids lost during exercise. While Tasty Foods’ financial position is still healthy, Abigail believes the company must introduce new products directed toward the “athletically inclined and health conscious” public to keep its position in the marketplace. She believes that if the company doesn’t “get on the bandwagon” soon, the firm will see a decline in revenues and lose its position in the marketplace.
In fact, immediately after she was hired, Abigail worked with the company’s marketing and new product development departments to launch a new athletic drink called “High Energy.” Marketing surveys had shown that the public was dissatisfied with athletic drinks currently on...