Indian River Citrus Company Case Study

Indian River’s management team has been considering introducing a new product—lite orange juice. Constand Consulting has been hired by Indian River Citrus Company to analyze this potential new product, along with three other potential investments, and present the finding the company’s executive team. Cash flow estimation and capital budgeting are essential in all businesses. When analyzing the cash flows that will occur after a specific project is accepted, special attention must be given to sunk costs, after-tax opportunity costs, cannibalization, and whether or not a project is an expansion or replacement project. Attachment 2 (page XXX and XXX) shows the cash flow estimation that Constand Consulting has prepared for Indian River where 5% price inflation and 2% cost inflation are expected. The NPV amount is estimated to be $166,719, IRR is 22.2%, MIRR is 17.2%, and payback period is 2.6 years. A project must consider inflation when projecting cash flows, because failure to do so, would result in key outputs that are either too low or too high. This can lead to incorrect decision making regarding the attractiveness of a

Three methods of analyzing stand-alone risk—sensitivity analysis, scenario analysis, and Monte Carlo simulations—are used often by managers, creditors, and investors alike. A sensitivity analysis has been conducted and the results are shown in Attachment 11 (page XXX). In a sensitivity analysis, one key variable is changed at a time and NPV is calculated and recorded. The sensitivity analysis conducted has revealed that the lite orange juice product is very sensitive to changes in unit sales, but not so sensitive to changes in salvage value or WACC changes. It is recommended that the management look at ways of hedging against changes in unit sales, possibly by securing long-term contracts with potential distributors or grocery store