Analysis of Super Project Case

Submitted by: FM2, Team 2 Ankur Gautam Atsushi Nagako Atul Ganeriwala Bo Wang Fahd Ahmed

Situation Background In 1967 General Foods Corporation planned to launch a new product by the name SUPER (flavored water soluble, powdered instant dessert). General Foods already had few products in the dessert market by the name Jelly-O , Kool Aid etc. Super was planned to use the same building where Jelly-O was manufactured and was to use the excess capacity of Jelly-O agglomerator. Further capital investment needed for Super was $200,000/ Super was expected to capture 10% of the market share upon its launch, of which 80% was to come from the dessert market and 20% from the erosion of Jelly-O. Problem Description While evaluating whether Super would be a good investment or not, Crosby Sanberg, a manager of financial analysis at General Foods presented three different ways of evaluating the return on Super. 1. Incremental basis: Considering only incremental revenue and investment which was $200,000/. This method did not accounted for $453,000/, which was the opportunity cost of the excess building capacity and Aggalomerator, and the over head cost of $19,000/ for the project. On calculating ROFE by this approach paid back period was 7years and ROFE was 63%. 2. Facility used basis: This approach took into account initial investment of $200,000/ and opportunity cost of $453,000/ but avoided accounting for $19,0000/ of overhead cost . ROFE for it was 34%. 3. Fully allocated basis: This approach included the opportunity cost and overhead costs. This method projected that Super would have a return of 25%, hence just barley meeting the minimum required return of 24% for a project of it's risk. Crosby is in a dilemma to decide the best method for evaluating the Super project since each method produced drastically different returns.

Evaluation of various aspects of cash flow and assumptions: 1. We have chosen to consider third approach of taking into account $453,000/ and $19,000/ while calculating the evaluation of Super as we feel that the facility is a un used assert which can be made to use for other projects as the Agglomerator and Building can be used for more than single function We also propose to adjust financial documents of Jelly-o and have the cost of the 2 asserts be written of it.. so that the assert is not taken into account at 2 places. 2. Inclusion of all incidental Effects: We support to take into account the effect of cannibalization for Jelly_O as we take this into consideration the fact that Super is expected to capture 10% of total desert market on its launch , this scenario is feasible only if General Foods Cooperation 's products have the monopoly (example of Microsofts products) and only its new products can reduce the sales of its existing products.

3. Tax calculation correction: We have taken into account the depreciation of the asserts acquired by Super before calculating the taxes and then adding the depreciation back to calculate the required cash flows. 4. Inclusion of opportunity cost: $453,000/ to be taken into account and be depreciated over the period of 10 years in the same ratios as proposed in exhibit 6 for initial investment of $200,000/.

5. Forget sunk cost: $360,000 has been considered as an sunk cost hence not been taken into account for calculating the NPV of the project. Reason for doing so is that we assume the research was done to estimate the acceptability of Super among the customers and hence that data will not be of any use later or to other projects. 6. Startup costs: Exbit 5 mentions about $15,000/ as the start up cost for engineering completion. We have considered this as an expense not a sunk cost as the money has been spent to renovate the old building of Jelly-O fish and has added value to the existing assert. And also if the Super project does not use it , the building could be used by General Foods Cooperation for some other project. 7. 8. Over head cost: $19,000/ is the over head cost and taken into consideration beginning year 5 and has been equally divided over year 5 to year 10 . Account for salvage value: As we are not provided with the details of the market value of the asserts, at the end of 10 year so we calculated the NPV of Super using the book value of the asserts.

Our Proposal: NPV of Super project comes to $319,000/ hence we recommend to take the project.