New capacity would have to be bought or built when capacity runs out or production would have to be cut back on one of the product lines, leading to a loss in cash flows that would have been generated by the lost sales runs. Thus, Blast would result in incremental cash flows for facilities and these should be included in cash outflow calculations.
However, the case states that Blast will require only 10% of Lift-Off's plant capacity. Yet, Lift-Off has excess capacity of 45%. This indicates that Blast may not lead to the need to add capacity in the future. However, this is something that the Danforth & Donnalley executives should explore further with detailed market forecasts. The case states that Blast is very different from conventional powdered products and may well generate tremendous demand requiring more capacity in the 15 years of time considered.
In summary, even when considering present and future opportunity costs, Blast does not appear to lead to incremental cash flows for production facilities and the cost of the excess capacity should be considered free in this particular scenario.
3. Would you suggest that the cash flows resulting from erosion of sales from current laundry detergent products be included as a cash inflow? If there were chances of competition introducing a similar product if you do not introduce Blast, would this affect your answer?
Product cannibalization occurs when a new product introduced by a firm competes with and reduces sales of the firm's existing products. In this case, Blast is likely to cannibalize the sales of Lift-Off and Wave. Based on a strict capital budgeting interpretation, cash flows resulting from lost sales Lift-Off and Wave should not be included as a cash inflow because they are not incremental. In other words, if the project is not accepted, the cash flows will occur anyway.
However, the laundry detergent market is extraordinarily competitive and it seems prudent to assume that a competitor will introduce a product similar to Blast. Thus, the market erosion of Lift-Off and Wave is likely to...
If the company does not take this step, to improve its product line and offer a better future option the company is likely to lose significantly more than the internal offset erosion of the existing brands. In fact the cash-flow question would only be an issue if another company were about to produce a product that would erode current sales of traditional products. Without the development of new products
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