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Cannibalization

6. It is 1995 and Food For Less (FFL), a grocery store, is considering offering one hour photo developing in their store. The firm expects that sales from the new one hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one hour service.

Calculate the incremental sales associated with introducing one hour photo service.

7. Suppose that of the 60% of FFL’s current overnight photo customers who switch to one hour processing, half would start taking their film to a competitor that offers one hour photo processing if FFL fails to offer the one hour service. If FFL does offer one hour processing these customers will continue to use FFL.

How does this additional assumption change the incremental sales calculation?

8. Discuss qualitatively how you might have incorporated the likely growth of digital photography in the sales projections developed above? (Remember hindsight is 20-20.)

What does this tell us about the impact on actual value added results from the estimates developed when making cash flow projections for a project?

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