Super Project - Case Solution

This case solution includes an Excel file with calculations.

1. What are the incremental 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?

In evaluating the Super Project, the management of General Foods should deal with issues such as a) Test market expenses, b) Overhead expenses, c) Erosion of Jell-O contribution margin, and d) Allocation of charges for the use of excess agglomerator capacity.

The Test market expenses should not be included in the cash flows because they are a sunk cost and not incremental.

The overhead expense should be included in the analysis by estimating the expansion of the project will increase its portion of the market. It will require extra capital and labor to sustain demand.

To get the overhead expense, you subtract profit from the facilities used basis from fully allocated for the six-year average to get a $90/year overhead expense in years 5-10.

We must also include the erosion of Jell-O sales as a negative cash flow in the analysis. The cannibalization will have a negative effect on the profitability of Jell-O, and if this is not included, the NPV will be overestimated.

The excess capacity for the agglomerator would not be included. The expense of the building was already covered when estimating the cost for Jell-O, meaning it would be double-counted if included. Also, revenue for the alternative uses would have been added, and not the cost of PP&E.

2. What insights does sensitivity analysis give into your decision?

Which variables is your decision most sensitive to? Could reasonable variation in these variables change your decision?

The Sensitivity Analysis provides you with information on how the different variables affect…