Super Project
The Super Project
The Super Project case mainly deals with the efficiency of project tool analysis in capital budgeting process. The three techniques that General Foods management used to determine whether Super Project was a worthwhile project were:
• Incremental basis
• Facilities-used basis
• Fully allocated facilities and costs basis
The three techniques mentioned above will be discussed in more details in question 4 below.
Questions:
1. What are the relevant cash flows for General Foods to use in evaluating the Super project? In particular, how should management deal with issues such as:
a) Test-market expenses?
b) Overhead expenses?
c) Erosion of Jell-O contribution margin?
d) Allocation of charges for the use of excess agglomerator capacity?
Typically, when using Net Present Value (NPV) method to determine whether a project adds value to the organization, free cash flow is taken into consideration. Depreciation expense, a non-cash item, is to be added back to the operating profit after tax to give operating cash flow. Other expenses such as SG&A and fixed costs are to be included in operating cash flow calculation. Change in net working capital (current assets – current liabilities) and capital expenditure are added to the operating cash flow to calculate free cash flow.
Test-market expenses are usually considered as sunk costs, and thus, should not be included in the expenses category. Overhead expenses refer to ongoing expenses of operating a business and are fixed costs. We can see from Exhibit 3 that there was a substantial increase in the SG&A expenses from 1958 to 1967 of more than 100% increase. Therefore, overhead expenses should be counted towards expenses when calculating the free cash flow.
Twenty percent of the 10% expected Super volume would come from the erosion of Jell-O sales. Although we do not have any data indicating the impact of Super on Jell-O contribution margin, it is safe to assume that as in any new product launches, when
The Super Project case mainly deals with the efficiency of project tool analysis in capital budgeting process. The three techniques that General Foods management used to determine whether Super Project was a worthwhile project were:
• Incremental basis
• Facilities-used basis
• Fully allocated facilities and costs basis
The three techniques mentioned above will be discussed in more details in question 4 below.
Questions:
1. What are the relevant cash flows for General Foods to use in evaluating the Super project? In particular, how should management deal with issues such as:
a) Test-market expenses?
b) Overhead expenses?
c) Erosion of Jell-O contribution margin?
d) Allocation of charges for the use of excess agglomerator capacity?
Typically, when using Net Present Value (NPV) method to determine whether a project adds value to the organization, free cash flow is taken into consideration. Depreciation expense, a non-cash item, is to be added back to the operating profit after tax to give operating cash flow. Other expenses such as SG&A and fixed costs are to be included in operating cash flow calculation. Change in net working capital (current assets – current liabilities) and capital expenditure are added to the operating cash flow to calculate free cash flow.
Test-market expenses are usually considered as sunk costs, and thus, should not be included in the expenses category. Overhead expenses refer to ongoing expenses of operating a business and are fixed costs. We can see from Exhibit 3 that there was a substantial increase in the SG&A expenses from 1958 to 1967 of more than 100% increase. Therefore, overhead expenses should be counted towards expenses when calculating the free cash flow.
Twenty percent of the 10% expected Super volume would come from the erosion of Jell-O sales. Although we do not have any data indicating the impact of Super on Jell-O contribution margin, it is safe to assume that as in any new product launches, when