Note: This case assumes that Jell-O would realize losses with or without the Chiffon project; however, a review of this case suggests the opposite. Actually, Jell-O would grow and the cost of the agglomerator should be included as an incremental cash flow.
In 1967, General Foods (GF) was contemplating the launch of a new product line - Chiffon. As one of the market leaders in the food business, the company was focused on increasing and protecting its current market share in the dessert category. Specifically, powdered deserts were forecasted to grow at a faster rate than other desserts. Jell-O, owned by GF, comprised 19% of the overall market; however, GF desired to launch a new product (Chiffon) in order to gain an increasing percent of the market as well as prevent new entrants.
The Chiffon Project needed careful consideration as it would cannibalize Jell-O sales, which comprised 19% of the market, and was growing. Chiffon would be successful based on market test results that GF conducted. Valuation of the Chiffon project was critical as it would determine whether or not the product line was launched.
The challenge lied in determining the appropriate methodology to use when valuing a project that would use existing PP&E. Three alternatives were presented: Incremental Basis, Facilities-Used Basis, and Fully Allocated Basis.
A combination of the three methods was used in determining the value of the Chiffon Project. The underlying determinant was that cash flows must be both incremental and predictable to be included in the cash flow analysis.
The value of GF in 1967 without Chiffon was $1.85 Billion. The value of the Chiffon Project was calculated to be (-) $10.6 Million. As a result, the value of GF with Chiffon was calculated as the difference between the two at $1.84 Billion. Based on our results, the Chiffon project should be rejected as it had a negative NPV and... [continues]
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