Super Project

1477 Words Oct 20th, 2008 6 Pages
The Super Project

The Super Project case mainly deals with the efficiency of project tool analysis in capital budgeting process. The three techniques that General Foods management used to determine whether Super Project was a worthwhile project were:
• Incremental basis
• Facilities-used basis
• Fully allocated facilities and costs basis

The three techniques mentioned above will be discussed in more details in question 4 below.

Questions:

1. What are the relevant cash flows for General Foods to use in evaluating the Super project? In particular, how should management deal with issues such as:

a) Test-market expenses?
b) Overhead expenses?
c) Erosion of Jell-O contribution margin?
d) Allocation of charges for the use of excess
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A project may have more than one IRR, especially when returns of an investment yield negative cash flows following positive cash flows.

Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.

While NPV method may be a more accurate way in capital budgeting process, it is worthwhile to note that because of the longer time it takes to generate the data (using the proper discount rate, for example), other easier and simpler methods like payback and ARR can be used as initial rough guides in the process.

3. How attractive is the Super project in strategic and competitive terms? What potential risks and benefits does General

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