The Super Project Case Study
FIN 3717
Braden Eddy, Lauren Gear and Dakota Conravey
The Super Project Case Study
FIN 3717
Braden Eddy, Lauren Gear and Dakota Conravey
Statement of Facts
General Foods is a large corporation organized by product lines. They are evaluating Super Project, the manufacture of a new powdered dessert. Crosby Sanberg, a financial analysis manager, must determine the value in accepting the proposal, along with J.C. Kresslin, the Corporate Controller. The Super Project will increase profit with a payback period of less than ten years. The proposed capital investment for the project is $200,000 ($80,000 for building modifications and $120,000 for machinery and equipment) and production would take place
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| 4.55 years |
The accounting for erosion of Jell-O sales yielded the following results: Exhibit 3 | Net Present Value | $182.33 | Internal Rate of Return | 14.63% | Average Rate of Return | 125.62% | Payback Period. | 6.39 years |
The accounting for including the excess capacity expense yields the following results: Exhibit 4 | Net Present Value | $375.35 | Internal Rate of Return | 16.11% | Average Rate of Return | 71.55% | Payback Period. | 5.80 years |
After review of the independent costs, we found that each one produces a positive NPV, an IRR above the discount rate and a payback period within the required ten years. However, it is unrealistic to consider these on an independent basis. For our realistic case, we included overhead expenses and the excess cost of capacity for the agglomerator. We did not include the erosion of Jell-O sales and the test market expense, as this is a sunk cost. Under these circumstances we produced the following results: Exhibit 6 | Net Present Value | $350.32 | Internal Rate of Return | 15.98% | Average Rate of Return | 58.91% | Payback Period. | 5.74 years |
In this analysis, we included the overhead expense for 1972-1977 because as the project begins to gain a foothold in the market it will acquire a larger market share and will become a larger portion of General Foods’ overall dessert sales. Also, the agglomerator and excess capacity was charged
If the company decided to sell the new product at price of D.Cr. 8.20, that means the full fixed expense of 1.20 is covered and the company will make high profit. However, the selling price of D.Cr. 8.20 is very high and under this price the company will sell the new product at a lower volume than what the company planned sale volume in the budget and that will affect the company in the market as a strong competitor in the food manufacturing. According to the case, the company sales volume drop to 30 tons when the product was sold at the price of D.Cr. 8.2. Thus, my recommendation are as follows:
Erosion of Jell-o contribution margin – This is clearly expected to be a direct impact of pursuing the Super project and thus should be included
required return of 24% for a project of it's risk. The dilemma for General Foods was to
EEC calculated the amount of time involved the anticipation of its cost ($3 million). The timeline in recovering their cost of investment ($2 million) initially for the foundation of this investment any profit made in the future of this investment will be justified as a profit for the company. If EEC can anticipate a fast return on its investment it is a profitable wise decision in making the investment financial, it is considered to be an easier way of formulating investments financially. On the basis of one year all cash flows is added together equal to the sum of $2 million originally invested, then it is divided by the annual cash flow of $500,000. The calculation of the payback period would equal four years. After this time frame any financial proceeds will be considered profitable for the company. I conclude that the timeframe is adequate in comparison of the investment in this worthwhile investment financial venture for the company.
An in depth analysis of the current costing methods used by the beverage distribution company, Johnson Beverage Inc.
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
Our approach to valuing the processing plant can easily be decomposed into three distinct steps first, find the value of the foreseeable free cash flows. Next, calculate the terminal value of the project. Finally, take the present value of those flows. The next few paragraphs walk through each of these steps in order of progression.
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:
Abby Conroy was tasked with calculating an effective quote for Breeland Ltd., she chose the activity based accounting costing system since it more accurately captures the related costs. A special order was placed by Breeland Ltd. with Ace Fertilizer Company. The did not plan to order more of this product in the future. Based on Ace’s policy, the special order included disposal costs for any used materials in the event no other orders existed for the unused materials at the time the Breeland contract was signed. Abby correctly calculated the total direct material and labor costs and accurately arrived at the indirect costs using the ABC method and used cost activity pools that make sense for the company and
7. Though numbers given in the cost data can not be contested, I would definitely contest the way total cost has been computed. The item 345 department operates within a large manufacturing facility that churns out number of other products too. Hence judging the profitability of item 345 on the basis of total cost is not practical.
The Standard Oil Company of California(Socal) is trying to determine how much to bid on the Gulf Oil Corporation. George Keller, the CEO of Socal, would need to borrow 14 billion dollars in order to make a substantial bid. While banks are willing to lend the money because of Socal's low to debt ratio, the loan would put the company in a highly leveraged position. In order to alleviate that debt, some of Gulf's assets could be sold. Keller has to consider the value of Gulf's exploration and development program when calculating future returns. Two billion dollars were being spent on the exploration and development program. This money could instead be used to reduce the debt if Socal acquired the company. However, the exploration program
5. The project is assumed to end in year 4. Do you think that this is realistic? Can you estimate the value of the project’s operating cash flows beyond year 4? State any assumptions you made.
If we look at the financial summary of M.L.I we can calculate how much Winkler can bid for this company. We can calculate Net Present Value, Indicial Rate of Return and Payback period for this project. If we take last year and estimated after tax Income as a projection and investment of $2 million we can calculate:
Decision: If Ms. Hadash evaluate the projects using the 8% discount rate, she would choose Alternative B which is to set up a new plant in order to