# Frozen food products: Cost of Capital Case Solution & Answer

Terminal value:

The terminal value of the project iscalculated on the basis of the growth rate beyond the five year period. It is calculated by multiplying the final year free cash flow of the project with the growth rate of 5% determined by the Mira and then dividing them with the difference of the growth rate and the discounting rate used by the company, this gives the terminal value of the project. The terminal value of the project is calculated as \$ 72.106 million. The calculation can be seen in the Exhibit#1.

NPV:

Net present value is used in the project appraisal by the companies to find out what amount of returns would the company get in return of the investment. It is calculated by calculating the present value of the future periods earning of the project and then the initial investment is deducted from this present value.
In the case of the future project of the frozen foods, thenet present value of the project for five year period is calculated as \$3,016,535. This is calculated by using the WACC as the discounting factor and bringing the future cash flows of five year period to their present value at year zero. All the calculations related to the NPV of the frozen food project can be seen in the Exhibit#1.

MIRR:

MIRR is also a tool to see the attractiveness of the proposed project. It is the modified IRR and is developed to resolve the problems in IRR. The IRR of the frozen food project is 23% whereas, the MIRR is 8%. MIRR is calculated by dividing the future value of the free cash flows with the present value of the free cash flows and then taking the under root of one over four and finally deducting it from one will give the MIRR of the proposed project.

Recommendations

Frozen food project has been tested through different techniques in order to find out its value addition to the firm and its ability to increase the expansion target of the company.The project has given the terminal value of \$ 72.106 million and the NPV iscalculated which is\$3 million. The IRR of the project is 23%; there are positive free cash flows during the five year period of the project.

Upon the analysis of all these indicators, the project of the frozen food is said to be a profitable project and is financially a feasible project and can be approved by Mira as it will add value to the company and will be able to fulfill the expansion target of the company. The project will also enable the company to learn foreign markets and will help to expand further to different regions and different markets.

Lastly, it is suggested to Mrs. Mira to make the decision in favor of this project……..

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