Super Project

Satisfactory Essays
Topics: Risk, Accept
Keisha M. Smith
Bus 436
Due Date: 04/30/15

Super Project Analysis

After carefully reviewing Super Project’s data, I’ve come to the conclusion that test market expenses and the allocation of charges for the use of the excess agglomerator capacity are not incremental because they are sunken costs that have already been accounted for. Whether Super is accepted or rejected, they will not affect the cash flows beyond current calculations. Overhead expenses is incremental because the expansion needed indicates increased business activity that will inquire an additional overhead costs of $540,000 to endure the demand for the goods. This increase in operating CL will create a change in the NOWC and a change in the FCF if it is accepted. These costs will not be present if Super is rejected. Lastly, erosion is also incremental because G.F. believes accepting this project will increase sales although it will be cannibalizing sales from its other sector, Jell-O. However, the firm has to anticipate the project’s impact on the entire firm. If they do not accept this project, their competition will in the near future which will take away future profitability (sales) as a whole & could decrease their firm’s market share. For Super Project, I calculated a positive NPV of $70M, an IRR of 12% (with WACC=10%) and a payback recovery of 6.7 years against a 10 year required payback. Those three factors tell me to accept the project. A positive NPV will result in profitability over the 10 year period, a positive EVA, & positive MVA. A positive IRR indicates we will be earning more than we are paying for the project and it will increase shareholder’s wealth. However, sensitivity analysis showed me that our NPV and IRR have steep slopes (extremely sensitive) which could change my decision. If WACC increased, the NPV could become negative meaning outflows exceed inflows (not profitable). If IRR falls below the WACC, they will be paying more than what will be earned back. It will also

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