...Super Project 1.What are the relevant cash flows for General Foods to use in evaluating the Super project? In particular, how should management deal with such issues as: a)Test-market expenses? The test market expense should not be included in the cash flow analysis since it is a sunk cost. Since the cost of the test market have already been made before the Super project had started. So regardless of this project being accepted or rejected, the cost must be taken as a sunk cost. b)Overhead expenses? The overhead expenses will not be taken into account in the FCF because it have been justified earlier in the Jello-O project. In addition to that, the data available in the exhibits does not provide specific information on incremental overhead expenses. OR it can be included if the expansion of super project will require extra capital and labour force to sustain the increasing demand for the product. c)Erosion of Jell-O contribution margin? It should not be included because it is directly related to the rest of the firm. When an economic obstacle happened to Jell -O sales due to erosion, it will leave a significant effect. It can be considered that the erosion might occur due to competition and by judging from Table A, it seems that the erosion due to competition is irrelevant and assumes a very low profitability. However, if we assume that Super project will get into the Jell –O sales and this must be taken as the cost for the project. d)Allocation...
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...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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...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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...was considering introducing a new product called the Super product. This product was “a new instant dessert based on flavored, water soluble, agglomerated powder” to both the United States and foreign markets. The capital investment was projected to be $200,000, and it would leverage the existing facilities used by the Jell-O manufacturing unit that had an available under-utilized capacity of its Jell-O agglomerate. A Nielsen market survey was done that showed a powered desert which would contribute to a significant growth market. The results projected that the product would capture 10% of the market share; 8% percent would be from new growth while 2% would come from the cannibalization of the current Jell-O-sales. The evaluation process to determine the investment opportunity for the Super Project was based on the incremental cash flow analysis. Crosby Samberg, a manager and financial analyst for General Food Corporation felt that this model was flawed and that a new more “accurate” model had to be used to examine the returns on the Super Project. The first assessment model was using the General Food acceptable practice of incremental analysis. The incremental anlaysis determined that Super Project have an attractive return of 63%. The second mythology was to add the facilities' costs, which examine the opportunity costs of leveraging the available pre-existing Jell-O equipment. This model determined that the Super Project would return 34%. The last approach was to allocate...
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...of management, which is occupied by a project manager, and a super intendant. Each project has their own project manager and super intendant that report to the owner/CEO. The company that I work for is a decentralized organization, where “decision making occurs at the level of the people who are most directly affected and have the most intimate knowledge about the problem” (Bateman & Snell, 2011). The reason that this is the most effective for this company is, because of the need in the construction industry for decisions made in a timely manner, in order for the project at hand to effectively and efficiently get done. In some instances it would not be conducive to go through the process of the decision going up the vertical structure. The company that I work for employs two different trades- sheet metal workers, and carpenters- this is the reason that if the company were organized with the functional structure or divisional structure, it would be less efficient. In the matrix structure, there is only one project manager, and one super intendant for each project. All of the decisions for both trades, for the project are made at this level. Since the company employs two different trades, the mutual adjustment coordination is essential. If the company were organized with the functional structure, any decisions would have to be collaborated horizontally between the project managers, sheet metal super intendant, and the carpenter super intendant. This would be a...
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...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. ANALYSIS Capital Budgeting Techniques The first issue that General Foods needs to address is their...
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...Bidding, Analysis of Companies, Select a Company Introduction of Client Company (Super Bank) Client Company is a financial institute named as Super Bank which serves their customers on daily basis via several nationwide branches and their ATMs accordingly. As discussed in last assignment, the current data service provider’s poor performance is badly affecting the company business and so an initiative has been taken to introduce a new service provider for smooth and seamless operation of Super Bank. Super bank has currently 100 nationwide branches and 50 ATMs and their Head office is located in Lahore. Following are some of the departments which are included in the completion of their new project, as they have to search a service provider that has to satisfy their specifications. 1. Network Support Department (NSD) This department includes the professional network Engineers which are monitoring the network of all the branches with Head Office. Link of each branch is monitored via NMS (Network Management System) ORION. Department contains a Head of Department, Manager Networks, an Assistant Manager Networks and Network engineers. So this team has to be familiar with the new data services provided by a provider and their devices which will be placed in each branch. 2. System Support Department (SSD) System engineers in this department are responsible for overall maintenance of the internal network of each branch i.e LAN side. They are divided among regions and...
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