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Super Project Case Solution

1) The document evaluates the Super Project case solution by analyzing relevant cash flows and generating NPV calculations under different scenarios. 2) It determines that test market expenses and overhead costs should be excluded from the NPV calculation. It also believes that potential erosion of Jell-O sales is not a reasonable cost. 3) Based on negative NPV calculations and the potential to detract from Jell-O, which is demonstrating a growing market share, the document concludes that rejection of the Super Project is the appropriate decision.

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350 views3 pages

Super Project Case Solution

1) The document evaluates the Super Project case solution by analyzing relevant cash flows and generating NPV calculations under different scenarios. 2) It determines that test market expenses and overhead costs should be excluded from the NPV calculation. It also believes that potential erosion of Jell-O sales is not a reasonable cost. 3) Based on negative NPV calculations and the potential to detract from Jell-O, which is demonstrating a growing market share, the document concludes that rejection of the Super Project is the appropriate decision.

Uploaded by

asaq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Super Project Case Solution

Funds allocated to projects or investments maintain an opportunity


cost because alternative uses for funds exist. Moreover, a project 's
acceptance/rejection is centered on an estimation of projected cash
flows; a discount rate or rate of return selected to demonstrate a
project 's risk; and finally, the present value of cash inflows minus the
present value of cash outflows.

When evaluating The Super Project www.casesol.com, the relevant cash


flows included the initial outlay for building modifications of $80,000
and the $120,000 for machinery and equipment. An additional outflow
of $453,000 is considered due to the loss of building and agglomerator
use to the Jell-O project. Estimated sales figures were provided and
not altered in our study as the figures are the sole pricing information
given. We did not include Test-Market Expenses in our NPV
calculation due to the fact that we treated them as sunk costs; costs
that were already incurred and irretrievable. "Test market volume was
packaged on an existing line, inadequate to handle the long run
requirements." Since this is the only mention of test-market expenses
and given that the line existed prior to project initiation, the expense
had been accounted for in the past. Thus, it is considered a sunk cost.
Overhead Expenses also were not included because their inclusion
would falsely inflate the NPV calculation. Moreover, the overhead
costs provided were done so on a company-wide basis and we were
not provided with a manner in which to allocate a percentage of those
costs to The Super Project. Had the case initiated an allocation
process in an itemized format of facility costs, labor costs, utility costs,
machinery usage costs, etc. we might have decided otherwise. As
discussed in class, overhead costs to some degree may be measured
from the Marketing, Administrative and General Expenses line item
provided in Exhibit 3, but, with no direction in the allocation of
overhead costs, we neglect to weigh them in our calculation. We also
believe that the erosion of Jell-O sales is not a reasonable cost in the
calculation process given that Jell-O and Super, based on the
information provided, are completely different products. A company
strives to achieve product differentiation or a cost leadership status
when it enters into a new business or introduces a new product. The
introduction of Super must fall under either category or a combination
of both and its sales should not detract from Jell-O given Super 's
product description. Furthermore, the Nielson dessert market and
sales survey demonstrated the growing market share of Jell-O and
combined with its brand recognition strength, we believe that Jell-O
sales should continue regardless of super 's introduction. We do,
however, allocate charges for excess agglomerator costs in our NPV
calculations. Two NPV calculations are presented:
1) Allocated cost of using jello facilities and agglomerator
2) Included purchase of new agglomerator during the 3rd period to
account for the growth of Jell-O sales in the 1st and 2nd period-
assuming Jell-O continues to grow.

After generating the appropriate cash flow estimates, management


must review the information by various capital budgeting techniques.
Basing a capital budgeting decision, such as commencement of The
Super Project, on a calculated accounting rate of return obscures the
timing concept and importance of actual cash flows.
Notwithstanding the negative NPV calculations provided, we do see
some benefit to the introduction of Super. Strategically, Super could
potentially erode a percentage of Jell-O 's sales through agglomerator
usage, but competitively, Super could increase recognition of the other
General Foods products and add sales of those product lines. Super
's introduction also offers the possibility of creating a new market that
could otherwise be usurped by a competing firm that introduces a
Super-like product.
In conclusion, acceptance of new projects at the cost of losing
development time for Jell-O ignores management 's basic assertion of
maximizing and magnifying shareholder returns. The Nielsen survey
demonstrates Jell-O 's developing sales trend and growing market
share. To ignore this fact would be tantamount to minimizing the
company 's market value by selecting projects that detract from
operations and products with growing market-share. Additionally, we
are not aware of any growth estimates set forth by General Foods that
require the addition of new products over time. In conclusion,
managers are required to make value-creating decisions for capital
expenditures – acceptance of The Super Project does not meet that
responsibility qualitatively or quantitatively, according to our
assumptions and calculations, and we believe that rejection of the
project is the appropriate decision.

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