Super is an ongoing project of General Foods to raise its share in the flavored water-soluble agglomerated powder market. It comes in 4 flavors, but 80% of the sales are expected to be chocolate flavored.
The project requires two types of investment. On the one hand the project would use some of the existing capacity of the company, on the other hand the project requires some modifications and some new equipment. According to our calculations, the whole project would require 200K incremental cash out, plus the timing effect cost of make the investment earlier than expected (190K).
A Nielsen survey indicates that we can expect to gain 10% of the market share with the new product. We examined that 20% of the total increase would be an erosion of Jell-O sales.
Relevant Cash Flow
First of all we ignored the test market expenses, since it is a sunk cost. Past expenses should not influence the decision-making, because this money had been spent already regardless of launching this project, therefore its irrelevant. On the other hand not taking into consideration the test market expense could be dangerous, because the more we have already spent on testing the project, the more likely the company going to launch it, because the majority of costs are already spent.
On the other hand we included the overhead expenses for the incremental period of the project. Since the project is responsible for the additional overhead expenses is should be calculated as an incremental cash outflow.
However, erosion of Jell-O sales should be included to the NPV calculation and treated as a cannibalization effect from Super. The reduced sales of Jell-O should be overbalanced by the increased sales of Super. Since the shareholders interested in the company as a whole, not in different project it doesn’t matter for them which projects generates profit. Since new products come out to the market all the time, Jell-O... [continues]
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