Cranfield Case Analysis

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Cranfield Inc. (B) Capital Budgeting I. Problem Statement Cranfield, Inc. had Maria Lopez and Robert Walker analyzed a lite cranapple cocktail project. However, they failed to analyze the risks, which play an important role for the company to decide whether to accept the project. Cranfield’s executive committee then required a new analysis on the risks of the project. In this report, the background of the project, the alternatives of the project, the analysis of the risks (both in general terms and applied to the lite cranapple project), and recommendations for their decision will be discussed. II. Background III. Alternatives The cost of capital of the project can be analyzed based on its stand-alone risk, corporate risk, or market risk. IV. Analysis Different types of risks and risk analysis are discussed first in this part because most members of Cranfield’s executive committee are strange with newly techniques of risk analysis. 1. a) Firm’s should be concerned with the riskiness of individual projects because the profitability of that project can effect the income/success of the firm as a whole. The firm must also consider whether the project will increase the firm’s and stockholders’ risk. b) 1. The three risks that are normally considered in capital budgeting are: Stand-alone risk, Corporate risk, Market (or beta) risk. 2. Market risk is most relevant. 3.Stand-alone risk is easiest to measure. 4. Generally, stand-alone risk reflects corporate risk because of the high correlation between core projects and other assets. If the project is highly correlated with the cconomy, then stand-alone risk (and in turn corporate risk) will also reflect the market risk. Due to the fact that cranberry juice is a normal good, we would expect the project’s risk to follow that of the economy’s, causing a high correlation

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