The Super Project

Introduction

General Foods (GF) expects Super, a new powdered dessert, to capture 10% share of the total dessert market (2% coming from the erosion of Jell-O sales). The company’s Financial Analyst has issued a memo comparing three alternative techniques for project evaluations, illustrating the problems and limitations inherent in using ROFE (return on funds employed) and payback as evaluation methods. The disparate ROFE results obtained with these methods are due to differences in the allocation of excess capacity from Jell-O equipment and overhead costs.

Problem Statement: How should GF allocate excess capacity and overhead costs in their evaluations of capital investments for profit increasing projects?

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In relation to the Super project, GF must account for the excess capacity that would be use by Super, ignore overhead and sunk costs, and use the incremental cash flow analysis method. Following this criteria, and assuming an interest rate of 10% we recommend that the Super Project be rejected because its NPV is -$438,11 < 1. Super project could only be accepted with a discount of 2.50% or less, where NPV will be positive. Only at this rate could GF deliver value to shareholders for the capital investment in this project.

APPENDIX B - Assumptions

1. All cash flows occur at the end of the year. 2. All periods are equal (one full year). 3. (1) Sales revenue: Based on Net Sales (line 25) of Exhibit 6, assuming Deductions come from purchase/early payment discounts or bad debt adjustments. 4. Equipment: Consists of: $120,000 (Super Project packaging equipment), 2/3 of $200,000 existing Jell-O building and 1/2 of $640,000 existing JellO agglomerator. 5. (2) Operating costs include COGS and Advertising Costs. 6. (3) Opportunity costs are based on Adjustments (line 34) of Exhibit 6, representing erosion of Jell-O profits (this figure was specified as representing the incremental adverse effect of the proposed project on other products). 7. (4) CCA and Depreciation:

CCA used for new equipment and machinery, based on Class 8 rate (20%), assuming CCA classes and rates were the same in 1968 and

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