Question

Upon further analysis, Moonbucks believes that sales of the new Coffee Slushie would cannibalize the sales of its existing Mochabomb Frappachino by 50% and will reduce cash flows by $15 each year.  

a)How can we define/what do we call this effect?

b)Should this effect be included in the cash flow projections?

c)In light of this new information, which project should be accepted?

Answer 1

This is called as cannibalization effect. For suppose, if a company envisaging to start a new project/product, there are chances that some of the customers buying these products shifting from buying other products of the company. So, here company is loosing out some of the existing revenues becuase of the new product roll out. This cost is called as cannibalization cost.

Yes, while projecting for new product cashflows, you should deduct the revenue that is coming from other products. This gives better results whether to accept or reject the project.

Despite deducting this cannibalization effect, if the project has positive NPV, company can accept the project or else they should reject it