The Super Project Case
Executive Summary
In the Super Project case, Crosby set out to argue that the current methodologies being utilized by General Foods Corporation to determine which capital investments to pursue did not always fit the bill. Crosby advocated using alternative methods for evaluation of Super including: 1) Incremental Basis, 2) Facilities Used Basis, and 3) Fully Allocated Basis. He provided the Corporate Budgets and Analysis management team with documentation that articulated each of the methods he used, the results obtained, discussion points, and ultimately his conclusions. As can be seen from the illustration below, each alternative provided vastly different outcomes, thus begging the question – which method should General Foods use? Our team analyzed Crosby’s suggested methods and then also included other capital budgeting techniques, such as IRR, NPV, and CBR. Using these concepts, we were able to compare and draw upon our own conclusions in order to provide a recommendation on whether to invest in the project or not.
Crosby’s Analysis of 3 alternative investment evaluation techniques
Method Alternative I: Incremental Basis (Current Method) Alternative II: Facilities Based Alternative III: Fully Allocated Basis
Results
Payback
ROFE
7 years
63%
34%
25%
Crosby’s Analysis • Super will use existing facilities that could be used for future alternative uses – which is not used as part of evaluation criteria
• Does not take into account opportunity loss • Puts various projects on common ground for purposes of relative evaluation • Overhead costs in the long run increase in proportion to level of business activity
• Anticipates an increase due to the volume increase and new production technology
Team’s Thoughts • Opportunity costs should be not be contemplated as part of the project investment decisions
• Project evaluation is point in time and cannot account for all possible future considerations • In this case, Super is not being evaluated
In the Super Project case, Crosby set out to argue that the current methodologies being utilized by General Foods Corporation to determine which capital investments to pursue did not always fit the bill. Crosby advocated using alternative methods for evaluation of Super including: 1) Incremental Basis, 2) Facilities Used Basis, and 3) Fully Allocated Basis. He provided the Corporate Budgets and Analysis management team with documentation that articulated each of the methods he used, the results obtained, discussion points, and ultimately his conclusions. As can be seen from the illustration below, each alternative provided vastly different outcomes, thus begging the question – which method should General Foods use? Our team analyzed Crosby’s suggested methods and then also included other capital budgeting techniques, such as IRR, NPV, and CBR. Using these concepts, we were able to compare and draw upon our own conclusions in order to provide a recommendation on whether to invest in the project or not.
Crosby’s Analysis of 3 alternative investment evaluation techniques
Method Alternative I: Incremental Basis (Current Method) Alternative II: Facilities Based Alternative III: Fully Allocated Basis
Results
Payback
ROFE
7 years
63%
34%
25%
Crosby’s Analysis • Super will use existing facilities that could be used for future alternative uses – which is not used as part of evaluation criteria
• Does not take into account opportunity loss • Puts various projects on common ground for purposes of relative evaluation • Overhead costs in the long run increase in proportion to level of business activity
• Anticipates an increase due to the volume increase and new production technology
Team’s Thoughts • Opportunity costs should be not be contemplated as part of the project investment decisions
• Project evaluation is point in time and cannot account for all possible future considerations • In this case, Super is not being evaluated