Question

The financial analyst at Michel-Luc’s Cajun Kitchen Co. is assessing the viability of adding pickled pigs’ feet to its product offerings. The firm’s marketing research team has concluded that the company could sell pickled pigs’ feet for 6 years, after which consumers’ tastes would likely shift to the next trendy food. Here are the figures the analyst is using to determine whether the company should undertake this proposed project: cost of equipment to make the pickled pigs’ feet $180,000 pro forma annual operating cashflow, for 6 years $ 40,000 nominal risk-free rate 3% company’s WACC 11% The pickled pigs’ feet project’s IRR is what %

Answer 1

Operating cash flow includes all the expenses like depreciation and taxes, hence no adjustment is needed for the same.

Cash flow at year zero = -180,000

Cash flow from C1 to C6 = +40,000

IRR calculated from Financial calculator = 8.895%

Given that the IRR is less than the WACC of the company (11%), the company should reject the project as it will generate negative NPV.