Sweet-Treats Corporation

Description

1. How do you recommend that the Lo-Cal Project be analyzed?

2. Should Sweet-Treats invest in the Lo-Cal Project? Assume that the appropriate cost of capital for the project is 11%.

3. Some issues for discussion:

a. In your opinion, is it appropriate to ignore cash flows after 10 years? If not, how would you adjust the cash flows in this case?

b. Have cannibalization “costs” been taken into account properly?

c. Has the cost of the new mixer been considered properly?

d. Have allocated overhead charges been taken into account properly?

e. Is it reasonable to require higher rates of return for “riskier” projects? If so, how would you measure “risk?”