“The Super Project” Case Analysis
December 3, 2008
Introduction and Problem Identification
Mr. Crosby Sanberg is the Manager of Financial Analysis at General Food Corporation. General Foods is currently starting a new product line called Super, which a innovative instant dessert. To produce said product, General Food would use the existing Jell-O agglomerator in manufacturing and must purchase new machinery and equipment costing $120,000 and perform building modifications for $80,000. It is early 1967 and Mr. Sanberg must decide whether or not to go through with the plans to begin the Super Project. Mr Sanberg developed three different options to evaluate the project: incremental basis (considers only incremental revenues, but fails to take into account the forgone opportunity cost of the Jell-O facilities), facilities used basis (incorrectly includes all overhead costs related to the facilities, when only the incremental overhead costs relating to the project should be considered), and fully allocated basis (correctly states overhead costs related to the project, but incorrectly includes overhead costs that are company-wide). Therefore, Mr. Sanberg’s assumptions are incorrect and as consultants, we will provide him with correct analysis.
To decide if Mr. Sanberg should choose to go forth with the Super Project, the NPV of the project and subsequently, the internal rate of return have to be determined. To begin the NPV analysis, the relevant and irrelevant costs are as follows: the test market and erosion costs are excluded; consequently the agglomerator and overhead costs are included. Next, the yearly cash flows from operations are found with the aid of a table and the assumptions are that the cost of capital rate is 10% and the tax rate is 52% (found by interpreting Exhibit 6). From said table, it is observed that negative cash flows only occur in the year zero and one due to the...