Super project - Group 2

Super project - Group 2 - The Super Project Tobey Overview...

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The Super Project Tobey
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www. sony wax waw .com Overview Case Summary ROFE & Capital Budgeting Incremental Analysis Analysis of Options Recommendations
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Overview Case Summary Problem Statement ROFE & Capital Budgeting Incredible Incremental Analysis Options Cash Flows Recommendations
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Case Summary • General Foods is a large corporation organized by Product Lines. • Super is a proposed new instant desert, based on a “flavored, water-soluble, agglomerated powder.” • General Foods has numerous projects with strict criteria to judge worthiness. • There are basically three types of Capital Investment proposals at General Foods: Safety, Quality, Increased Profit • Increased Profit: Cost Reduction, Capacity, New Product Max 10 years payback : as low as 20% PBT • … if expected to be permanent product addition • … if facilities highly reconfigurable • Three analysis types: Incremental, Facilities-based and Fully Allocated.
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Problem Statement • Above all, Super’s worthiness as a capital investment must be evaluated according to General Foods’ accepted criteria. • Memos indicate that General Foods’ finance personnel are questioning the same criteria’s ability to accurately reflect the value of the Super project. • T his is not an accoun t ing e x ercise . In accounting, one tries to track and atribute all sources of costs. Also, one alters transaction timings to match expenses with income. • This is a capital budgeting exercise . We’re interested in cash flows to judge the value of a project, and when those cash flows occur. • Therefore, our team must 1) evaluate the pertinence of each of the analysis types to Super; and 2) evaluate the worthiness of the Super project.
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General Foods – ROFE •GF uses Return On Funds Employed (ROFE) to evaluate the viability of capital projects, and to weigh one project against another to determine prioritization. Wh at i s R OF E? ROFE = E BIT / Capital Invested ( book value ) •A financial performance metric, ROFE captures a simple relationship •Ratio of EARNINGS created from the book value of capital invested •Using EBIT, does not capture net operating cash flow •Uses Book value (depreciated value) of capital investments • If capital assets are depreciated, they appear to create a cash flow • Depreciation is an Accounting Expense not a Cash Flow. • Artificially biases long-term asset-intensive projects, as they have bigger apparent depreciation cash flows •Does not capture the time value of money; interest and inflation ROFE is not a tool to evaluate capital projects. Even used as a metric to compare capital ear ning s performance, has flaws .
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Capital Budgeting In
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