1.

After going through the case, suggest as to what percentage of the test market expenses should be included as a cost for the super project? 2. The current CAPEX process is ignoring the cost of the building and excess agglomerate capacity. Sandberg is proposing something different. Given the facts in the case and/or additional assumptions, who do you agree with? If you think both methods are flawed can you propose a better alternative? 3. Similarly, Sandberg disagrees with the current treatment of overhead costs. Given the facts in the case, what is your opinion? 4. The company is charging the Super project with the erosion caused to the Jell-O profits. As a finance analyst identifies the conditions under which this would be the correct approach. Similarly identify conditions under which erosion can be ignored. Given the facts in the case what is the correct thing to do? 5. Given your recommendations above please advise the management whether they should undertake "The super Project".

Sunk costs (test market expenses) To illustrate the reason for excluding sunk costs from the capital budgeting decision, consider the following scenarios related to the Super Project (NPV numbers have been made up to help reinforce the reason to exclude sunk costs) Case 1: - including sunk cost in NPV analysis where NPV=-$100000 In this case the project would be rejected; however the firm would be losing value as they have already incurred the cost of $360000. In effect their value would be decreased by the full amount of $360000 Case 1: - excluding sunk cost in NPV analysis where sunk costs=$360000 and NPV= $260000 In this case the project would be accepted with $260000 going towards recovering the sunk costs already incurred. Overall the firm is still losing value in this case $100000 but they are better off by $160000by accepting the project This example shows that if they include the sunk costs in the NPV analysis and reject the project the firm would make a faulty decision and destroy mare value than if they excluded the sunk costs and accepted the project However in long term the firm must consider sunk costs. If they continually accept projects with positive NPVs but do not help recover the costs already incurred (i.e. sunk costs related to the project) they will not be adding value. This is where the firm must conduct stage analysis to ensure they are indeed accepting projects that help to recover sunk costs

Firms should also ensure they consider possible sunk costs like test marketing expenses BEFORE they actually incur them. This can be achieved through the use of decision trees and NPV analysis to decide whether to proceed with such test marketing and eventually projects from the very beginning