Analysis of Super Project Case
Quick Overview
Relevant cash flows analysis
The relatively well posed project with promises of great future pay offs must be examined closely nevertheless to determine its true profitability. As such, the Super Project’s NPV must be calculated, however before we proceed we must acknowledge the relevant cash flows. The project incurred an expense of testing the market. This expense, however, must not be included in our cash flow analysis because it can be considered a sunk cost. This expense is required for ‘taking a temperature’ of the market and will not be recovered. Other sources of cash flow include:
a) Overhead expenses
a. This must undoubtedly be included in our cash flow analysis. The
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Crosby
Sanberg, a manager of financial analysis at General Foods presented three different ways of evaluating the return on Super. The first was an incremental basis that was regularly used by General Foods in evaluating projects. It projected that Super would have an attractive return of 63%. The second was a facilities-used basis, which took into account the opportunity cost of using available, pre-existing Jell-O equipment. This method projected that Super would have a return of 34%. The last approach was a fully allocated basis that included the opportunity cost and overhead costs. This method projected that Super would have a return of 25%, just barley meeting the minimum required return of 24% for a project of it's risk. The dilemma for General Foods was to decide what the best method for evaluating the Super project was since each method produced drastically different returns.
c)
Super Project will eat into the Jell-O Sales and this must be taken as a cost for the project when making the final decision.
Super project’s share ($453K) of the building and agglomerator capacity
a. Unlike the previous two cash flows where we considered them based on the direct impact they bring, the super project’s share of the building and agglomerator capacity must not be considered in our cash flow for the following reasons:
i. The expense of the building was
The team also chose to calculate IRR as another method of evaluating the Super Project. Again
Moreover, Robert Gates’ estimation of the price increase (2.0%) differs from the information provided in the case (1.7%). This overestimates revenue and thereby FCF. To make better projections for the firms’ FCF, Robert Gates would also have to consider the opportunity cost of alternative investments, the risk exposure throughout the project and operational risks after three years.
Problem 1: Jonathon Barrs is a manager for Easy Manufacturing, LLC. He wishes to evaluate three possible investments. These investments are for the purchase of new machine tools from Germany, Japan, and a local US manufacturer. The firm earns 10% on its investments and they have a risk index of 5%. The chart below lays out the expected return and expected risks of the three projects.
When we look at 75% occupancy, the rate of return (net earnings divided by amount invested) is $298,000/$3,525,000 = 8.4%. . This return should be regarded as low; as the
What are the relevant cash flows for General Foods to use in evaluating the Super project? In particular, how should management deal with issues such as:
Since only contract services industry provide a return above this threshold, any future projects in lodging and restaurants industry which achieve the threshold for the returns in that industry will be ignored unless they achieve a return of 12.02%. This would result in the INCREASE in the total assets under contract services division of the company and a DECLINE in the proportion of assets for the other division. With the passage of time, the company will stop taking any projects in other divisions and would exclusively handle the contract services division, this would result in a decline in the value of the firm since the contract services industry contributes lesser to the total profits of the firm compared to its contribution in sales (For 1987, contract services contributed to 46% in sale and 33% in profits as against 41% and 51% for lodging and 13% and 16% for restaurants). Also this would result in the company taking up the riskiest projects in the industry.
The GDV or capital value of the development was calculated by multiplying the estimated rental value by the years purchase in perpetuity @ 3.5%
4.0 Discussion on execution of the three elements by Project Manager for the successful planning, resourcing and execution of a project.
This report will now focus on comparing the strengths and weaknesses of the NPV approach to two other investment appraisal approaches, internal rate of return (IRR) and pay-back.
The information in the following sections is derived from: Loulakis, M. C. and McLaughlin, L. (2009). Government Found Liable for Delays in Design/ Build Project. Civil Engineering, Vol. (79). p96-96. 1p.
To get a better valuation of that company, we went more in detail, to understand the real impact of a project like Achieve. We computed the expected cash flows for the next 10 years. But, cash flow analysis is a
Further, Finance and Executive Committee members had recommended over the course of five years that the benchmark be increased annually by 5%, to a maximum of 50%. Recently, this philosophy was revisited and after reviewing updated information, it was determined that this level of reserve may be too conservative and the use of a range was recommended in order to fund these worthwhile projects, with the minimum being 25%. There are six Special Project categories, which include the following:
The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).
Poor Cash flow management may bring about lack of working capital and in this way undermine the maintainability of a venture. While industry has extensively acknowledged successful cash flow management as an execution change component, the prevalence of scholastic examinations concerning the connection between money streams and execution looks at the issue from a static, benchmarking viewpoint (Ebben and Johnson, 2011; Farris and Hutchison, 2002, 2003; Moss and Stine, 1993). Compelling cash flow management includes anticipating, arranging, observing and controlling of money receipts and instalments. Project cash flow is for the most part registered in light of assessed expense and income over the development time frame.