Question

A firm that produced Little O's cereal is considering coming out with Honey-Nut Little O's cereal. The new cereal will most certainly reduce the sales of the original Little O's cereal. When calculating the cash flows associated with the new project, should the amount of the lost sales be considered a cash outflow?

Circle one: Yes or No

Briefly explain the reasoning behind your answer here:

Answer 1

Yes.

This is called as cannibalization factor/cost. Company's new product which has similarities with already existing product will be affected like fall in the sales. So, company should subtract the cannibalization cost while arriving at the new product cashflow anaysis. This reduction in the cashflow will give the actual picture for the investment decision.

For example, Dell introduces laptops into the market,while arriving at the cashflows, they should deduct how much revenues would eat way existing desktop sales. This process gives scope for a better analysis.