The Super Project Case Study

1152 Words Feb 7th, 2007 5 Pages
General Foods Corporation is an organization that manufactures consumer food products. The corporation is "organized along product lines in the United States," including Post, Kool-Aid, Maxwell House, Jell-O, and Birds Eye. Their customers are retail consumers.

The Super Project presented General Foods management with the possibility to introduce a new dessert product, named Super, into the market. The dilemma management faced was how to appropriately measure and allocate costs associated with the project, as well as, whether to accept or reject the project based on costs and future cash flows generated by Super. With regard to The Super Project or any capital budgeting decision, time value of money concepts are central to financial
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The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

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