{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

TheSuperProject_dissention - ELEMENTS OF MODERN FINANCE...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
ELEMENTS OF MODERN FINANCE - MGCR-641 THE SUPER PROJECT Prepared By: Bogdan Enoiu Chris McLachlin J. Alejandro Noboa February 03, 2006 EXECUTIVE SUMMARY PROBLEMS 1. Is General Foods using the proper capital budgeting methods in evaluating their potential projects? 2. Should General Foods invest in the Super project? In evaluating the Super Project, what are the relevant cash flows to use? In particular: Test market Expenses Overhead Expenses Erosion of Jell-O contribution margin Allocation of charges for the use of excess agglomerator capacity OPTIONS Evaluation Methods – NPV, IRR, Payback, Alternative 1, 2, or 3 o Test Market Expenses – Include or Exclude o Overhead Expenses – Include or Exclude o Erosion of Jell-O contribution margin – Include or Exclude o Allocation of charges for the use of excess capacity – Include or Exclude Accept or Reject the Super Project RECOMMENDATIONS 1. NPV is the best capital budgeting method for evaluating projects. 2. Do not include test market expenses as they are sunk costs. 3. Include only incremental overhead expenses specific to the project. 4. General Foods should account for erosion of Jell-O margin as this reflects incremental costs of the project. 5. Account for allocation of charges for the use of excess capacity as an opportunity cost. 6. Reject Super Project as it has a negative NPV.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The Super Project Page 1 A N A L Y S I S Capital Budgeting Techniques The first issue that General Foods needs to address is their capital budgeting techniques. General Foods currently uses ROFE and payback (depending on the type of project) and both methods are flawed, possibly leading to faulty capital budgeting decisions. We must also address each of the alternative methods as proposed by Crosby Sanberg. The use of the payback method for evaluating new projects has several flaws. The first is that it ignores the cash flows that occur after the payback time; second it does not account for the time value of money and thus is not consistent with the objective of the firm to maximize value. Among the 3 proposed alternatives concerning the evaluation of the Super Project, Alternative 1 (Incremental Basis) is flawed due to the fact that it does not include the costs associated with the use by the Super Project of the idle capacity from the Jell-O project (the building space and the processing capacity of the Jell-O agglomeration machinery). These costs should be included as they are opportunity costs (see below) so the decision to consider them sunk costs in alternative 1 is incorrect. Moreover, alternative 1 does not consider any of the incremental overhead costs incurred as a result of accepting the Super Project, therefore not recognizing all cash flows.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}