Super Project

In: Business and Management

Submitted By lanireyes99
Words 614
Pages 3
Spring 2003 Professor Kose John

The Super Project Case – Questions and Hints

I have digested the data in Exhibit 6 to produce Modified-Exhibit#6, in the Excel Spreadsheet on my website.The management analysis in Exhibit 6 does not deduct depreciation from the project’s taxable income. I have done that in Modified-Exhibit#6.

- In Exhibit 6, the first change in Net Working Capital occurs in period 1. I have kept that assumption in Modified-Exhibit#6. It is ok to move all changes in NWC back one period, if you prefer to do so.

- The depreciation calculation uses an old formula that is no longer used in practice. I have explained the formula and derived depreciation and book values in Modified-Exhibit#6.

Suppose you are responsible for making the final decision about the Super Project, on March 1967, and you have read all the data and the analysis in “The Super Project”. Should you go ahead with the project or not? I will help you out by asking a few specific questions, the type of questions you would have to ask yourself in a real world situations.

Specific questions

1) Are the cash flows in Exhibit 6 or Modified-Exhibit#6 correct? Notice that the reason for including the cash flows in Exhibit 6 is explained in detail in the “The Super Project”. In particular, should General Foods include the following or not? Discuss briefly.

a) Test market expenses;

b) Charges for the use of Jell-O agglomerator capacity;

c) Charges for erosion of Jell-O sales;

d) Overhead expenses;

Tip: Read Crosby Sandberg’s analysis in Appendix A carefully, and also the reply in Appendix B. And remember the discussions we had in class about incremental cash flows.

2) Based on your discussion in 1) what are the expected, incremental, after-tax cash flows for the Super Project? Use a tax rate of 52%. Assume the salvage value of the project is equal to…...

Similar Documents

The Super Project

...Xiaoyin University Of California Santa Barbara Department of Economics A nalysis of Super Project Case Q uandaries of incremental analysis Q uick Overview In 1966-67, General Foods Corporation was considering introducing a new product called Super, “a new instant dessert based on a flavored, water-soluble, agglomerated powder,” to U.S. and foreign markets. The proposed capital investment for the project was $200,000, and its production would take place in an existing building in which Jell-O was manufactured using the available capacity of a pre-existing Jell-O agglomerator. Once introduced into the market, Super was expected to capture a 10% market share, 8% of which would come from growth in the dessert market and 2% of which would come from the erosion of Jell-O sales. In evaluating whether Super would be a good investment or not, the problem of evaluating projects based on only incremental cash flows was brought up. Crosby Sanberg, a manager of financial analysis at General Foods presented three different ways of evaluating the return on Super. The first was an incremental basis that was regularly used by General Foods in evaluating projects. It projected that Super would have an attractive return of 63%. The second was a facilities-used basis, which took into account the opportunity cost of using available, pre-existing Jell-O equipment. This method projected that Super would have a return of 34%. The last approach was a fully allocated basis......

Words: 1289 - Pages: 6

Super Project

...MGCR-641 THE SUPER PROJECT EXECUTIVE SUMMARY PROBLEMS 1. Is General Foods using the proper capital budgeting methods in evaluating their potential projects? 2. Should General Foods invest in the Super project? In evaluating the Super Project, what are the relevant cash flows to use? In particular: • Test market Expenses • Overhead Expenses • Erosion of Jell-O contribution margin • Allocation of charges for the use of excess agglomerator capacity OPTIONS • Evaluation Methods – NPV, IRR, Payback, Alternative 1, 2, or 3 o Test Market Expenses – Include or Exclude o Overhead Expenses – Include or Exclude o Erosion of Jell-O contribution margin – Include or Exclude o Allocation of charges for the use of excess capacity – Include or Exclude • Accept or Reject the Super Project RECOMMENDATIONS 1. NPV is the best capital budgeting method for evaluating projects. 2. Do not include test market expenses as they are sunk costs. 3. Include only incremental overhead expenses specific to the project. 4. General Foods should account for erosion of Jell-O margin as this reflects incremental costs of the project. 5. Account for allocation of charges for the use of excess capacity as an opportunity cost. 6. Reject Super Project as it has a negative NPV. ANALYSIS Capital Budgeting Techniques The first issue that General Foods needs to address is their capital budgeting techniques. General Foods currently uses ROFE and payback (depending on the type of......

Words: 2562 - Pages: 11

Super Project

...Super Project Case • What are the relevant cash flows that General Foods should use in evaluating the Super Project? In particular, how should management deal with such issues as o Test-market expenses? o Overhead Expenses? o Erosion of Jell-O contribution margin? o Allocation of charges for the use of the excess agglomerator? The relevant cash flows that General Foods should use in evaluating the Super Project are considered Incremental cash flows and are “the changes in the firm’s cash flows that occur as a direct consequence of accepting the project”. Incremental cash flows include changes in working capital; cost of project, overhead expenses, erosion of Jell-o margin, opportunity cost (allocation of charges for the use of the excess agglometor), net proceeds and tax savings from the sale of old assets. General Foods Accounting and Financial Manual specified that capital project request be prepared on an incremental basis. Although Super Project incurred an expense of testing the market, this expense must not be included in the cash flow analysis because it can be considered a sunk cost. General Foods expected Super to capture a 10% share of the total desert market. This expense is required for conducting market research and will not be recovered. Sources of cash flow include, Overhead expenses, which must be included in the cash flow analysis. The estimated expansion of the Super Project to capture 80% of the market will require extra capital......

Words: 507 - Pages: 3

Super Project

...power: Medium (5). The buyer power is a product of the industry competition and readily available substitutions. Buyers have a large degree of indirect influence. Everyday people will respond to price changes by simply switching to the many alternatives created by rival firms causing the retail stores to buy less of a product to put on their shelves. In a sense, Food Manufacturers are both business-to-business and business-to-consumer. Also, if a dominant retail store arrives, they will directly negotiate prices down to their liking. Threat of new entrants:  Low(3). Anyone can produce food. However, to mass-manufacture it, there is a huge initial outlay involved with PPE. Even with using only excess capacity, it cost $200,000 to set up super project in 1967. Adding in inflation, the 2013 equivalent of this is $1,400,461.08. Also, many food manufacturing companies that are relatively large have access to economies of scale which help them thrive in an industry that leans toward perfect competition. With so much price pressure in the industry, a new entrant does not have time to perfect the manufacturing process and will be immediately operating at a loss. Threat of supplier power: Low(3). With food manufacturing, there rarely is an occasion to worry about suppliers. The only exception may be in specific, niche types of food - blowfish to name one. Raw food supplies are readily available for processing at fair, competitive prices with economies of scale. Actually, to......

Words: 2339 - Pages: 10

Super Project

...conclusion that sunk costs were relevant to capital project evaluations. In this case though, he could not have been more wrong. The sunk costs are lost once they are spent, and should definitely not be used to evaluate the Super Project. General Foods is a large company with various divisions in both domestic and foreign operations. One account executive states that they want to grow more rapidly than the GDP, and develop projects accordingly. The Super Project will allow them to reach that goal. The NPV in the base is $2,196.30, with an IRR of 25.6%. Even in the worst case scenario, which includes change in net working capital as well as after tax erosion, the NPV is $232.70 with an IRR of 10.3%, far outpacing national GDP growth. General Foods enjoys a significantly large market share in the food business. They face many risks from competitors, and they actively seek the opportunity to fill out their product line whenever possible. As of the moment the company lacks a large share of the dessert market. Super would offer the company a chance to develop a larger share of that market, and even with the serious risk of erosion present, the larger risk is losing leadership throughout the food industry. P.D.C. Consulting highly recommends that management actively seeks to develop the Super Project. QUESTIONS 1. The relevant cash flows for General Foods used in evaluating the Super Project (SP) are overhead expenses, erosion of......

Words: 1565 - Pages: 7

Super Project

...The Super Project Tobey Overview • Case Summary • Problem Statement • ROFE & Capital Budgeting • Incredible Incremental • Analysis Options • Cash Flows • Recommendations Case Summary • General Foods is a large corporation organized by Product Lines. • Super is a proposed new instant desert, based on a “flavored, water-soluble, agglomerated powder.” • General Foods has numerous projects with strict criteria to judge worthiness. • There are basically three types of Capital Investment proposals at General Foods: Safety, Quality, Increased Profit • Increased Profit: Cost Reduction, Capacity, New Product • Max 10 years payback: as low as 20% PBT • … if expected to be permanent product addition • … if facilities highly reconfigurable • Three analysis types: Incremental, Facilities-based and Fully Allocated. Problem Statement • Above all, Super’s worthiness as a capital investment must be evaluated according to General Foods’ accepted criteria. • Memos indicate that General Foods’ finance personnel are questioning the same criteria’s ability to accurately reflect the value of the Super project. • This is not an accounting exercise. In accounting, one tries to track and attribute all sources of costs. Also, one alters transaction timings to match expenses with income. • This is a capital budgeting exercise. We’re interested in cash flows to judge the value of a project, and when those cash flows occur. • Therefore, our team must 1) evaluate the pertinence of each of......

Words: 1233 - Pages: 5

Super Project Case Analysis

...Analysis of Super Project Case Quick Overview Relevant cash flows analysis The relatively well posed project with promises of great future pay offs must be examined closely nevertheless to determine its true profitability. As such, the Super Project’s NPV must be calculated, however before we proceed we must acknowledge the relevant cash flows. The project incurred an expense of testing the market. This expense, however, must not be included in our cash flow analysis because it can be considered a sunk cost. This expense is required for ‘taking a temperature’ of the market and will not be recovered. Other sources of cash flow include: a) Overhead expenses a. This must undoubtedly be included in our cash flow analysis. The estimated expansion of the Super Project to capture 80% of the market will require extra capital and extra labor force to sustain the increasing demand for the product. b) The erosion of Jell-O Sales a. This also must be included in our cash flow analysis. An economics hit that Jell-O sales will receive due to erosion will be significant. Erosion might occur naturally due to competition, but judging by Table A in HBS Super Project Description we can deduce that erosion due to competition is irrelevant and assumes a very low likelihood. However, based on prognosis In 1966-67, General Foods Corporation was considering introducing a new product called Super, “a new instant dessert based on a flavored, water-soluble, agglomerated powder,” to U.S....

Words: 1141 - Pages: 5

Super Project

...Analysis of Super Project Case Quandaries of incremental analysis Quick Overview In 1966-67, General Foods Corporation was considering introducing a new product called Super, “a new instant dessert based on a flavored, water-soluble, agglomerated powder,” to U.S. and foreign markets. The proposed capital investment for the project was $200,000, and its production would take place in an existing building in which Jell-O was manufactured using the available capacity of a pre-existing Jell-O agglomerator. Once introduced into the market, Super was expected to capture a 10% market share, 8% of which would come from growth in the dessert market and 2% of which would come from the erosion of Jell-O sales. In evaluating whether Super would be a good investment or not, the problem of evaluating projects based on only incremental cash flows was brought up. Crosby Sanberg, a manager of financial analysis at General Foods presented three different ways of evaluating the return on Super. The first was an incremental basis that was regularly used by General Foods in evaluating projects. It projected that Super would have an attractive return of 63%. The second was a facilities-used basis, which took into account the opportunity cost of using available, pre-existing Jell-O equipment. This method projected that Super would have a return of 34%. The last approach was a fully allocated basis that included the opportunity cost and overhead costs. This method projected that Super would......

Words: 1197 - Pages: 5

Super Project

...Mindmapping in 8 Easy Steps Mindmapping is one of the simplest, yet most powerful, tools a person can have in her creativity toolbox. It is a non-linear way of organizing information and a technique that allows you to capture the natural flow of your ideas. Here's a five minute workshop on how to use this flexible tool. Try it the next time you need to write a memo, prepare a meeting agenda or are trying to get a bird's eye view of a complex project. Step 1: Center First. Our linear, left-brain education system has taught us to start in the upper left-hand corner of a page. However, our mind focuses on the center ... so mindmapping begins with a word or image that symbolizes what you want to think about placed in the middle of the page. Step 2: Lighten Up! Let go of the idea of finding a cure for cancer, ending hunger, solving the problem or writing a report that your boss will love. Mindmapping is simply a brain dumping process that helps stimulate new ideas and connections. Start with an open, playful attitude ... you can always get serious later. |Step 3: Free Associate. As ideas emerge, print one or two word descriptions of the ideas on lines branching from the central | |focus. Allow the ideas to expand outward into branches and sub-branches. Put down all ideas without judgment or evaluation. | |[Next] | |[pic] ...

Words: 686 - Pages: 3

The Super Project

...The NPV is the bet capital budgeting method for evaluating projects, and test market shouldn’t be included as they are sunk costs but we should include incremental overhead expenses specific to the project. It is also recommended that General Food account for erosion of Jell-O margins as this reflects incremental costs of the project. It should also account for allocation of charges for the use of excess capacity as an opportunity cost and maybe reject the project as it has a negative NPV We feel that General Foods Corporation ought to go ahead with the Super Project. While we feel the incremental costs approach lacks a certain degree of sufficiency in taking into account all overhead, we believe the $453,000 cost of using the existing Jell-O facilities would have already been accounted for on the Jell-O balance sheet and thus is a non-factor in determining the profitability of the Super Project. When we added the cost of erosion, which we feel is the most accurate indicator of the project’s net profitability, we found the NPV to be equal to $150,000. We felt this was the best method because the capital expenditure on the existing equipment had already been taken into account upon its original purchase. Management accountants can help to formulate strategy by providing information about the sources of competitive advantage—for example, the cost, productivity, or efficiency advantage of their company relative to competitors or the premium prices a company can charge...

Words: 334 - Pages: 2

Super Project

...tcpdf.org) OLIN BUSINESS SCHOOL Summer 2015 Advanced Corporate Finance IIIFrontiers of Valuation B62 FIN 534C Professor Todd Milbourn B62 MGT 534C Advanced Corporate Finance III – Frontiers of Valuation Summer 2015 Professor Todd Milbourn The Olin Business School Table of Contents 1. Valmont Industries HBP Case # UVA-F-1191 ............................................................................... 1 2. Super Project HBP Case # 9-112-034 ........................................................................................... 21 3. Calaveras Vineyards HBP Case # UVA-F-1094 ........................................................................... 37 4. Paginas Amarelas HBP Case # UVA-F-1210 ............................................................................... 63 5. Using Crystal Ball HBP Case # UVA-QA-0561 .......................................................................... 89 6. Valuation in Emerging Markets HBP Case # UVA-F-1455 ......................................................... 95 7. Project Valuation in Emerging Markets HBP Case # 9-702-077 ............................................... 113 8. Valuing Companies in Corporate Restructurings HBP Case # 9-201-073 ................................. 131 UVA-F-1191 Rev. Feb. 1, 2011 VALMONT INDUSTRI V IES, INC. Forty years ago, we made our fi F m irst center p pivot irriga ation system It was m. es ssentially a long steel pipe resting upon a set of......

Words: 49316 - Pages: 198

The Super Project

...Corporate Finance The Super Project (HBS) Instructor: Pål E. Korsvold BI Norwegian School of Management McGraw-Hill/Irwin abc McGraw−Hill Primis ISBN: 0−390−68861−4 Text: Harvard Business School Negotiation Cases This book was printed on recycled paper. Finance http://www.mhhe.com/primis/online/ Copyright ©2006 by The McGraw−Hill Companies, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without prior written permission of the publisher. This McGraw−Hill Primis text may include materials submitted to McGraw−Hill for publication by the instructor of this course. The instructor is solely responsible for the editorial content of such materials. 111 FINAGEN ISBN: 0−390−68861−4 Finance Contents Harvard Business School Negotiation Cases Super Project 1 1 Case iii Harvard Business School Negotiation Cases The Super Project Case © The McGraw−Hill Companies, 2005 1 9-112-034 REV: MAY 27, 2004 The Super Project In March 1967, Crosby Sanberg, manager-financial analysis at General Foods Corporation, told a casewriter, “What I learned about incremental analysis at the Business School doesn’t always work.” He was convinced that under some circumstances sunk costs were relevant to capital project......

Words: 7275 - Pages: 30

Super Project

...Super Project 1.What are the relevant cash flows for General Foods to use in evaluating the Super project? In particular, how should management deal with such issues as: a)Test-market expenses? The test market expense should not be included in the cash flow analysis since it is a sunk cost. Since the cost of the test market have already been made before the Super project had started. So regardless of this project being accepted or rejected, the cost must be taken as a sunk cost. b)Overhead expenses? The overhead expenses will not be taken into account in the FCF because it have been justified earlier in the Jello-O project. In addition to that, the data available in the exhibits does not provide specific information on incremental overhead expenses. OR it can be included if the expansion of super project will require extra capital and labour force to sustain the increasing demand for the product. c)Erosion of Jell-O contribution margin? It should not be included because it is directly related to the rest of the firm. When an economic obstacle happened to Jell -O sales due to erosion, it will leave a significant effect. It can be considered that the erosion might occur due to competition and by judging from Table A, it seems that the erosion due to competition is irrelevant and assumes a very low profitability. However, if we assume that Super project will get into the Jell –O sales and this must be taken as the cost for the project.......

Words: 712 - Pages: 3

Super Project

...Analysis After looking at the Super project of General Food and the alternative evaluations, we concluded that the project should make some changes. First, the agglomerator and building should be included in the project in order to reflect the true cost of the investment (Exhibit 5- page). According to Mr. Samberg’s suggestion, the minimum should be to take 453 million (half of an existing agglomerator and two thirds of an existing building) of agglomerator and the building should be record as an opportunity cost. Second, the cash flow from operation should be change due to the change on overhead expenses, test market expense, adjustment erosion, and depreciation (Exhibit 3- page). Normally, overhead expenses are not included but, due to this case, the project expects a $90 million per year increase in overhead expenses during the last 6 years. The test market expense is the sunk cost so it should not be included in the cash flow. Regardless of who produces the project, adjustment of erosion will always occur because the introduction of the new product in the market. In this case, the change in erosion should be included in the cash flow for operation because the project affects their other sales. Depreciation expense should change due to the change in agglomerate and building (Exhibit 2- page ). We needed to determine the correct allocation of depreciation. We calculated the depreciation rates by dividing the Depreciation Expense by the previous year’s Net Investment......

Words: 626 - Pages: 3

The Super Project Case

...The Super Project Case Analysis Dilemma of incremental analysis [Author Name] General Foods is a large corporation organized by Product lines. Corporation was planning to introduce a new product Super – a new instant dessert, based on flavored, water-soluble, agglomerated powder. Super would be offered in four flavors although chocolate was estimated to account for 80% of total sales. The requested capital investment for Super was $200,000, and its production would take place after modifying an existing building, where Jell-O was manufactured and by using available capacity of Jell-O agglomerator. Cost for the key machine was not included in the project. On the basis of test market experience, once the product is introduced, it was expected to capture a 10% of dessert market share, 80% of which would come from growth in total dessert market share and 20% of which would come from erosion of Jell-O sales. There are basically four categories of capital investment project proposals at General Foods corporation: (1) safety and convenience; (2) quality; (3) increase profit; and other. Super project was considered into third category, as a profit-increasing project. Crosby Sanberg, a manager of financial analysis at General Food Corporation calculated return on investment in three different ways of on Super Project. The first technique was Incremental basis, which projected Super project would have an attractive return of 63% in 7 years, which in-turn could directly identify......

Words: 1321 - Pages: 6