1. Does the coffee packaging project maximize the firm’s value?
In terms of business expansion, an additional field of production, which is the coffee packaging, is a plus for the firm to gain besides their current profits. The coffee packaging project is an investment, which will also increase the operating costs. It is much like merchandising which is sold for extra profits. This project will maximize the firm’s values because different types of coffee label can attract consumers. It will also be very helpful for the consumers to differentiate between the coffee flavors. However, the firm also needs to make sure the laminating process has a high quality. This is because the coffee stays fresh, as it is a resource that needs to have extra nourish or it will lose its flavor. Regarding the financial profits for the firm, for now it is uncertain whether this project would generate enough profit to be undertaken.
2. Should the company undertake this project, the prior project, or both?
According to the rules of project evaluation, a project should only be accepted if its IRR (Internal Rate of Return) is not less than the targeted rate of return when comparing two or more mutually exclusive projects. The project with the highest value of IRR should be accepted. So, according to the calculations the IRR for the previous project for food packaging was 22.19% and for this one it is 3.34%. Therefore, it is best for the company to not choose this project and hence take the previous one.
3. What advice should I give to John Matthews and the board?
The advice to be given to John Matthews and the board would be simply to choose the previous project of food packaging over the current coffee packaging. Since, the IRR for food packaging exceeds the cost of capital, which is 1% , comparing it to the coffee packaging whose IRR is 3.34% and does not exceed the cost of capital, which is 5%. Following the rule of project evaluation, if the...