The Super Project Case Study

Topics: Net present value, Internal rate of return, Rate of return Pages: 4 (1141 words) Published: January 26, 2007
General Foods Corporation is an organization that manufactures consumer food products. The corporation is "organized along product lines in the United States," including Post, Kool-Aid, Maxwell House, Jell-O, and Birds Eye. Their customers are retail consumers.

The Super Project presented General Foods management with the possibility to introduce a new dessert product, named Super, into the market. The dilemma management faced was how to appropriately measure and allocate costs associated with the project, as well as, whether to accept or reject the project based on costs and future cash flows generated by Super. With regard to The Super Project or any capital budgeting decision, time value of money concepts are central to financial decision making. Funds allocated to projects or investments maintain an opportunity cost because alternative uses for funds exist. Moreover, a project's acceptance/rejection is centered on an estimation of projected cash flows; a discount rate or rate of return selected to demonstrate a project's risk; and finally, the present value of cash inflows minus the present value of cash outflows.

When evaluating The Super Project, the relevant cash flows included the initial outlay for building modifications of $80,000 and the $120,000 for machinery and equipment. An additional outflow of $453,000 is considered due to the loss of building and agglomerator use to the Jell-O project. Estimated sales figures were provided and not altered in our study as the figures are the sole pricing information given. We did not include Test-Market Expenses in our NPV calculation due to the fact that we treated them as sunk costs; costs that were already incurred and irretrievable. "Test market volume was packaged on an existing line, inadequate to handle the long run requirements." Since this is the only mention of test-market expenses and given that the line existed prior to project initiation, the expense had been accounted for in the...
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