Factors to Consider in Capital Budgeting Decision for Expanding into Bottled Lemonade Business

Explanation

These are all incremental cash flows and should be considered.

In the capital budgeting decision process, companies evaluate potential investment opportunities to determine whether they should undertake a new project or expand their existing operations. When considering the expansion into the bottled lemonade business, Pickles Corp. should incorporate various factors into its decision-making process. Let's analyze each statement provided in the question:

A. All of the statements are correct. This option suggests that all the statements provided are relevant factors that should be considered by the company. While it's essential to review each statement individually to determine its validity, this option can be considered a potential answer.

B. If the company doesn't produce lemonade, it can lease the building to another company and receive after-tax cash flows of $500,000 a year. This statement highlights a potential opportunity cost associated with entering the lemonade business. If Pickles Corp. decides not to produce lemonade, it can lease the building to another company and generate additional cash flows of $500,000 per year after considering taxes. This lease income should be considered when evaluating the profitability of the lemonade business and determining whether it outweighs the benefits of leasing the building.

C. The company will spend $3 million to renovate a building for the proposed project. This statement points out the initial capital expenditure required for the project. Pickles Corp. will need to invest $3 million to renovate a building to support the bottled lemonade business. This investment should be considered in the capital budgeting decision, as it will affect the project's profitability and potential return on investment.

D. If the company enters the lemonade business, its iced tea sales are expected to fall 5 percent as some consumers switch from iced tea to lemonade. This statement highlights a potential impact on the existing iced tea sales if Pickles Corp. enters the lemonade business. The company anticipates a 5 percent decline in iced tea sales as some consumers shift their preference to lemonade. This factor is crucial in estimating the potential cannibalization effect on existing products and assessing the overall impact on the company's revenue and profitability.

E. None of the statements are correct. This option suggests that none of the statements provided are relevant factors to consider in the capital budgeting decision. However, upon reviewing the statements individually, it becomes evident that at least some of them are indeed valid factors that should be incorporated into the decision-making process. Therefore, option E is not the correct answer.

Considering the analysis of each statement, the correct answer would be: A. All of the statements are correct.

By taking all of these factors into account, Pickles Corp. can make a more informed capital budgeting decision regarding its potential expansion into the bottled lemonade business.