estimate the cfroi of healthy foods using the conventional cfroi approach 546395

Healthy Soups is a company that manufactures canned soups made without preservatives. The firm has assets that have a book value of $100 million. The assets are 5 years old and have been depreciated $50 million over that period. In addition, the inflation rate over those 5 years has averaged 2% a year. The assets are currently earning $15 million in after-tax operating income. They have a remaining life of 10 years and the depreciation each year is expected to be $5 million. At the end of these 10 years, the assets will have an expected salvage value, in current dollars, of $50 million.

a. Estimate the CFROI of Healthy Foods, using the conventional CFROI approach.

b. Estimate the CFROI of Healthy Foods, using the economic depreciation approach.

c. If Healthy Foods has a cost of capital in nominal terms of 10% and the expected inflation rate is 2%, evaluate whether Healthy Foods’ existing investments are value creating or destroying.