Super Project HBS
1.i. Test Marketing Expense: These can be identified as sunk costs, using the with-or-without test. These costs were undertaken to determine whether the Super project was feasible, and would exist even if the project were deemed unfeasible.
1.ii. Overhead Expenses: Mr. Sanberg proposed to include these in the fully allocated method used in Alternative III. However, we believe that these expenses have already been attributed to the Jell-O line of products, and the data does not explicitly provide the overheads attributed to the Super project. Hence, these should not be considered while evaluating the project.
1.iii. Erosion of Jell-O contribution margin: As the Super line is expected to cannibalize 20% of the Jell-O line’s sales, the erosion of Jell-O’s sales must be taken into account.
1.iv. Allocation of charges for the use of excess agglomerator capacity: General Foods has probably already accounted for these costs while evaluating the Jell-O line. Hence, these should not be counted again while evaluating the Super Project. However, management should keep in mind that these costs could bear an opportunity cost for the Jell-O line in the future, if there were an expansion of demand for Jell-O further down the road.
2)
To analyze the attractiveness of the investment in the Super Project, we must use the estimated cash flows calculated to derive a decision based on a particular capital budgeting technique. Within this report we have considered the Accounting Rate of Return, the Payback Period, the Internal Rate of Return (IRR) and the Net Present Value (NPV) techniques. The accounting rate of return is defined as the average after-tax profit divided by the average invested capital. The average invested capital for the Super Project is simply the average of the $200,000.00 initially required and the Total Working Funds (line 20) for each period forecasted in Exhibit 6. The average after-tax profit is simply the average of the Net Profit (line 37) for each
1.ii. Overhead Expenses: Mr. Sanberg proposed to include these in the fully allocated method used in Alternative III. However, we believe that these expenses have already been attributed to the Jell-O line of products, and the data does not explicitly provide the overheads attributed to the Super project. Hence, these should not be considered while evaluating the project.
1.iii. Erosion of Jell-O contribution margin: As the Super line is expected to cannibalize 20% of the Jell-O line’s sales, the erosion of Jell-O’s sales must be taken into account.
1.iv. Allocation of charges for the use of excess agglomerator capacity: General Foods has probably already accounted for these costs while evaluating the Jell-O line. Hence, these should not be counted again while evaluating the Super Project. However, management should keep in mind that these costs could bear an opportunity cost for the Jell-O line in the future, if there were an expansion of demand for Jell-O further down the road.
2)
To analyze the attractiveness of the investment in the Super Project, we must use the estimated cash flows calculated to derive a decision based on a particular capital budgeting technique. Within this report we have considered the Accounting Rate of Return, the Payback Period, the Internal Rate of Return (IRR) and the Net Present Value (NPV) techniques. The accounting rate of return is defined as the average after-tax profit divided by the average invested capital. The average invested capital for the Super Project is simply the average of the $200,000.00 initially required and the Total Working Funds (line 20) for each period forecasted in Exhibit 6. The average after-tax profit is simply the average of the Net Profit (line 37) for each