...The Super Project Tobey Overview • Case Summary • Problem Statement • ROFE & Capital Budgeting • Incredible Incremental • Analysis Options • Cash Flows • Recommendations 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. 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. • This is not an accounting exercise. In accounting, one tries to track and attribute 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...
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...conclusion that sunk costs were relevant to capital project evaluations. In this case though, he could not have been more wrong. The sunk costs are lost once they are spent, and should definitely not be used to evaluate the Super Project. General Foods is a large company with various divisions in both domestic and foreign operations. One account executive states that they want to grow more rapidly than the GDP, and develop projects accordingly. The Super Project will allow them to reach that goal. The NPV in the base is $2,196.30, with an IRR of 25.6%. Even in the worst case scenario, which includes change in net working capital as well as after tax erosion, the NPV is $232.70 with an IRR of 10.3%, far outpacing national GDP growth. General Foods enjoys a significantly large market share in the food business. They face many risks from competitors, and they actively seek the opportunity to fill out their product line whenever possible. As of the moment the company lacks a large share of the dessert market. Super would offer the company a chance to develop a larger share of that market, and even with the serious risk of erosion present, the larger risk is losing leadership throughout the food industry. P.D.C. Consulting highly recommends that management actively seeks to develop the Super Project. QUESTIONS 1. The relevant cash flows for General Foods used in evaluating the Super Project (SP) are overhead expenses, erosion of Jell-O-Contribution...
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...power: Medium (5). The buyer power is a product of the industry competition and readily available substitutions. Buyers have a large degree of indirect influence. Everyday people will respond to price changes by simply switching to the many alternatives created by rival firms causing the retail stores to buy less of a product to put on their shelves. In a sense, Food Manufacturers are both business-to-business and business-to-consumer. Also, if a dominant retail store arrives, they will directly negotiate prices down to their liking. Threat of new entrants: Low(3). Anyone can produce food. However, to mass-manufacture it, there is a huge initial outlay involved with PPE. Even with using only excess capacity, it cost $200,000 to set up super project in 1967. Adding in inflation, the 2013 equivalent of this is $1,400,461.08. Also, many food...
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...The NPV is the bet capital budgeting method for evaluating projects, and test market shouldn’t be included as they are sunk costs but we should include incremental overhead expenses specific to the project. It is also recommended that General Food account for erosion of Jell-O margins as this reflects incremental costs of the project. It should also account for allocation of charges for the use of excess capacity as an opportunity cost and maybe reject the project as it has a negative NPV We feel that General Foods Corporation ought to go ahead with the Super Project. While we feel the incremental costs approach lacks a certain degree of sufficiency in taking into account all overhead, we believe the $453,000 cost of using the existing Jell-O facilities would have already been accounted for on the Jell-O balance sheet and thus is a non-factor in determining the profitability of the Super Project. When we added the cost of erosion, which we feel is the most accurate indicator of the project’s net profitability, we found the NPV to be equal to $150,000. We felt this was the best method because the capital expenditure on the existing equipment had already been taken into account upon its original purchase. Management accountants can help to formulate strategy by providing information about the sources of competitive advantage—for example, the cost, productivity, or efficiency advantage of their company relative to competitors or the premium prices a company can charge...
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...MGCR-641 THE SUPER PROJECT 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. ANALYSIS 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...
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...Super Project Case • What are the relevant cash flows that General Foods should use in evaluating the Super Project? In particular, how should management deal with such issues as o Test-market expenses? o Overhead Expenses? o Erosion of Jell-O contribution margin? o Allocation of charges for the use of the excess agglomerator? The relevant cash flows that General Foods should use in evaluating the Super Project are considered Incremental cash flows and are “the changes in the firm’s cash flows that occur as a direct consequence of accepting the project”. Incremental cash flows include changes in working capital; cost of project, overhead expenses, erosion of Jell-o margin, opportunity cost (allocation of charges for the use of the excess agglometor), net proceeds and tax savings from the sale of old assets. General Foods Accounting and Financial Manual specified that capital project request be prepared on an incremental basis. Although Super Project incurred an expense of testing the market, this expense must not be included in the cash flow analysis because it can be considered a sunk cost. General Foods expected Super to capture a 10% share of the total desert market. This expense is required for conducting market research and will not be recovered. Sources of cash flow include, Overhead expenses, which must be included in the cash flow analysis. The estimated expansion of the Super Project to capture 80% of the market will require extra capital and...
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...Corporate Finance The Super Project (HBS) Instructor: Pål E. Korsvold BI Norwegian School of Management McGraw-Hill/Irwin abc McGraw−Hill Primis ISBN: 0−390−68861−4 Text: Harvard Business School Negotiation Cases This book was printed on recycled paper. Finance http://www.mhhe.com/primis/online/ Copyright ©2006 by The McGraw−Hill Companies, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without prior written permission of the publisher. This McGraw−Hill Primis text may include materials submitted to McGraw−Hill for publication by the instructor of this course. The instructor is solely responsible for the editorial content of such materials. 111 FINAGEN ISBN: 0−390−68861−4 Finance Contents Harvard Business School Negotiation Cases Super Project 1 1 Case iii Harvard Business School Negotiation Cases The Super Project Case © The McGraw−Hill Companies, 2005 1 9-112-034 REV: MAY 27, 2004 The Super Project In March 1967, Crosby Sanberg, manager-financial analysis at General Foods Corporation, told a casewriter, “What I learned about incremental analysis at the Business School doesn’t always work.” He was convinced that under some circumstances sunk costs were relevant to capital project evaluations. He was...
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...Analysis After looking at the Super project of General Food and the alternative evaluations, we concluded that the project should make some changes. First, the agglomerator and building should be included in the project in order to reflect the true cost of the investment (Exhibit 5- page). According to Mr. Samberg’s suggestion, the minimum should be to take 453 million (half of an existing agglomerator and two thirds of an existing building) of agglomerator and the building should be record as an opportunity cost. Second, the cash flow from operation should be change due to the change on overhead expenses, test market expense, adjustment erosion, and depreciation (Exhibit 3- page). Normally, overhead expenses are not included but, due to this case, the project expects a $90 million per year increase in overhead expenses during the last 6 years. The test market expense is the sunk cost so it should not be included in the cash flow. Regardless of who produces the project, adjustment of erosion will always occur because the introduction of the new product in the market. In this case, the change in erosion should be included in the cash flow for operation because the project affects their other sales. Depreciation expense should change due to the change in agglomerate and building (Exhibit 2- page ). We needed to determine the correct allocation of depreciation. We calculated the depreciation rates by dividing the Depreciation Expense by the previous year’s Net Investment (both...
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...tcpdf.org) OLIN BUSINESS SCHOOL Summer 2015 Advanced Corporate Finance IIIFrontiers of Valuation B62 FIN 534C Professor Todd Milbourn B62 MGT 534C Advanced Corporate Finance III – Frontiers of Valuation Summer 2015 Professor Todd Milbourn The Olin Business School Table of Contents 1. Valmont Industries HBP Case # UVA-F-1191 ............................................................................... 1 2. Super Project HBP Case # 9-112-034 ........................................................................................... 21 3. Calaveras Vineyards HBP Case # UVA-F-1094 ........................................................................... 37 4. Paginas Amarelas HBP Case # UVA-F-1210 ............................................................................... 63 5. Using Crystal Ball HBP Case # UVA-QA-0561 .......................................................................... 89 6. Valuation in Emerging Markets HBP Case # UVA-F-1455 ......................................................... 95 7. Project Valuation in Emerging Markets HBP Case # 9-702-077 ............................................... 113 8. Valuing Companies in Corporate Restructurings HBP Case # 9-201-073 ................................. 131 UVA-F-1191 Rev. Feb. 1, 2011 VALMONT INDUSTRI V IES, INC. Forty years ago, we made our fi F m irst center p pivot irriga ation system It was m. es ssentially a long steel pipe resting upon a set of wheels...
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...Mindmapping in 8 Easy Steps Mindmapping is one of the simplest, yet most powerful, tools a person can have in her creativity toolbox. It is a non-linear way of organizing information and a technique that allows you to capture the natural flow of your ideas. Here's a five minute workshop on how to use this flexible tool. Try it the next time you need to write a memo, prepare a meeting agenda or are trying to get a bird's eye view of a complex project. Step 1: Center First. Our linear, left-brain education system has taught us to start in the upper left-hand corner of a page. However, our mind focuses on the center ... so mindmapping begins with a word or image that symbolizes what you want to think about placed in the middle of the page. Step 2: Lighten Up! Let go of the idea of finding a cure for cancer, ending hunger, solving the problem or writing a report that your boss will love. Mindmapping is simply a brain dumping process that helps stimulate new ideas and connections. Start with an open, playful attitude ... you can always get serious later. |Step 3: Free Associate. As ideas emerge, print one or two word descriptions of the ideas on lines branching from the central | |focus. Allow the ideas to expand outward into branches and sub-branches. Put down all ideas without judgment or evaluation. | |[Next] | |[pic] ...
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...The Super Project Case Analysis Dilemma of incremental analysis [Author Name] General Foods is a large corporation organized by Product lines. Corporation was planning to introduce a new product Super – a new instant dessert, based on flavored, water-soluble, agglomerated powder. Super would be offered in four flavors although chocolate was estimated to account for 80% of total sales. The requested capital investment for Super was $200,000, and its production would take place after modifying an existing building, where Jell-O was manufactured and by using available capacity of Jell-O agglomerator. Cost for the key machine was not included in the project. On the basis of test market experience, once the product is introduced, it was expected to capture a 10% of dessert market share, 80% of which would come from growth in total dessert market share and 20% of which would come from erosion of Jell-O sales. There are basically four categories of capital investment project proposals at General Foods corporation: (1) safety and convenience; (2) quality; (3) increase profit; and other. Super project was considered into third category, as a profit-increasing project. Crosby Sanberg, a manager of financial analysis at General Food Corporation calculated return on investment in three different ways of on Super Project. The first technique was Incremental basis, which projected Super project would have an attractive return of 63% in 7 years, which in-turn could directly identify with...
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...Angio-Specialist at the Spearmens. Ali, even though, coming from a rural background, has a passion for electronics, and the passion has driven him through different uneven circumstances, but his career at Spearmens is distinguishing. The current offer of the Service in charge at Islamabad office takes him into the managerial ranks, but on the other hand he has other considerations to make. The first one is the family status. Ali’s wife teaches at a university of Lahore and Ali has always encouraged her to pursue her goals. She has devoted considerable energy to her career in teaching. While all this time she has been staying at her parents’ home, she has been urging Ali to have their own home in Lahore. Ali, on the other hand is considered as a Super Engineer at the company, and has been extensively traveling. The company’s environment is yet another consideration which Ali has to make i.e. over the years he has been given several engineering assignment but no managerial assignment, so, if he accepts this offer, he...
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...*******This is what I turned in. Please take into account the professor comments when you analyse the case. Good luck!****** Pepsi Refresh Project Case Analysis Problem Definition Should Pepsi continue the Pepsi Refresh Project? If so, how should the marketing strategy and execution be changed to use the project’s success to drive Pepsi sales? Decision Alternatives ( add a bit more detail with each alternative) 1. Discontinue the Pepsi Refresh Project and use the funds for advertising again. 2. Continue the project as it was originally intended. 3. Continue the project with less commitment and a different purpose. Background Pepsi brand originated in 1898 as a hand mixed carbonated drink sold at a pharmacy in North Carolina. It is a division of PepsiCo, a global brand that sells snack foods, beverages, and food brands. Valued at over $14 billion, PepsiCo is ranked 23rd on the Interbrand best global brands list. The Pepsi brand includes Pepsi, Diet Pepsi and Pepsi Max. Pepsi brand is positioned as the drink for the young and the young at heart. The senior marketing director and the head of the Pepsi Refresh Project, Ana Maria Irazabal says, “Pepsi’s DNA has always been, “Spirit of the challenger, celebration of next generation, and of optimism & things young at heart.”” Pepsi has always positioned its drink for the young and young at heart and has featured artists, models, sports figures, and the like in their advertising to promote this...
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...Question: Should Brisk be advertised on prime time TV or with viral ads in the month following the Super Bowl ad? Why? Answer: Background: Mekanism (new digital media advertising agency hired by PLP) was tasked to work on re launch of Brisk Iced tea, a RTD (ready to drink) tea brand which was launched in mid-1990s by PLP (Pepsi Lipton Tea Partnership) and had its glory in 90s and later became stagnant. Brisk’s first major advertising campaign was launched in 1996, was a series of television and print ads featuring clay based animation versions of iconic characters and celebrities. After Brisk campaign wrapped up in 2002, PLP stopped investing in mainstream advertising, opting to support its core brand, Lipton. PLP decided to invest heavily in promotion of this brand in 2011. Judgement: PLP should go for viral ad and below are supporting reasons in importance order: * While Brisk’s sales were growing, the brand was falling behind its competitor in terms of its social media presence. Mekanism concluded from one study comparing social media campaigns that Brisk was practically absent from this space (Exhibit 5) * Table A below displays sales and market shares from 2007-2010. It’s to be noted here, Brisk sales were growing fast with minimal consumer oriented promotion was done in this period with the exception of package redesign, POS display and other trade promotion activity * For fiscal ending May 2010, Brisk was 3rd in rank and it’s sales volume growth...
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...Unit 10 Project “Tried and True” Budweiser’s Marketing Strategies Endure through the Decades Jacqueline M. Milohnic CM 105-17 Budweiser utilizes a broad range of marketing strategies in order to anchor a wide spectrum of consumers who continuously find themselves identifying with the ever changing characteristics of their mascots. “The Budweiser tradition of the total, marketing concept remains a constant. In areas including sports marketing and entertainment, Budweiser reigns supreme.” (Marketing Hall of Fame, NY AMA, 2005). Budweiser has consistently been the top selling beer on the globe for the past 39 years. Budweiser leverages its cleverly written advertisements to entice such audiences as young adults, sports buffs, and the more mature client base. The eight hitched team of powerful Clydesdales have become the national trademark of Anheuser-Busch. “In 1933, August A. Busch, Jr.gave a hitch of Clydesdales to his father in celebration of the resumption of brewing in St. Louis following the repeal of Prohibition. These high- stepping horses make hundreds of public appearances each year in addition to appearing in television commercials and other Budweiser beer advertising.” (Beckius, Your Guide to New England Travel, July 2, 2007). Therefore, the most recognizable and enduring advertising tool possibly ever used dates back to 1933, and to this day brings back memories of a similar time depicted by a horse drawn wagon...
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