Assignment problem: General Mills has been forced to develop new products to offer to an increasingly demanding market. Traditional cereals and packaged food products are not attractive to a more mobile and demanding consumer. Technology, health/diet awareness, and lifestyle have affected how and what consumers demand from the grocery store.
GM's kitchens have developed a breakfast meal which is highly nutritious, can be heated in the microwave for 2 minutes, and can be consumed while driving because of its unique packaging design. It has test marketed the product and consumer feedback has been very positive.
It will require an initial investment of $20M.
Cash flows realized after all expenses are expected to be $2M each in the years 1, 2 and 3, $5M in years 4, 5, 6 and 7, and $3M in years 8, 9 and 10. Beyond that, management expects $3M per year in perpetuity.
All cash flows happen at the end of period.
If the cost of capital is 12%, should the company proceed? What is the NPV and IRR? Show all you work.