Super Project

Corporate Finance

Executive Summary
General Foods is considering an investment in a novel type of dessert where they hope the
benefits will be as sweet as the instant powder taste. The powdered dessert market has been
growing significantly in the total dessert market and Super Project, the name of General Foods
flavored powder, aims to capture 10% of the total dessert market. Currently, General Foods JellO product is in this space. Upon initial analysis, it was decided that Super Project would be
manufactured in the existing Jell-O facility. Also, knowing that Super Project would invade JellO sales, General Foods must consider various criteria to ensure the project is a worthy
investment. There are three different capital budgeting alternatives, each yielding very different
Return On Funds Employed (ROFEs):
1) Incremental = 63%; this ROFE is based on incremental revenue and investments that could be
directly identified with the Super Project.
2) Facility-Used = 34%; this ROFE is based on the Incremental method with the addition of
factoring in opportunity cost. Per the financial analysis, the opportunity cost based on the prorated share of the facilities is $453,000.
3) Fully Allocated = 25%; this ROFE takes incremental, opportunity cost, and overhead into
account.
The team argues that the most accurate way to evaluate the Super Project is via Alternative 1
(Incremental Basis). The team will reason that Incremental should be accounted in this
budgeting process, shown in Exhibit A. The team recommends for General Foods to invest in
the Super Project based on calculations for both the NPV and IRR.
Investment Evaluation Technique Employed
The Incremental Basis was used for evaluating this project because this method accounts for
costs directly associated with the Super Project. Based on the facts given in the case, the team
quantified which issues (and corresponding cash flows) should be considered when determining
whether or not to progress the Super Project.
Test marketing expenses were a sunk cost and therefore were not included in the Free Cash Flow
(FCF) calculation, as the $360,000 was used prior to the consideration of the Super Project.
Overhead expenses were included since extra capital and labor will be required to sustain the
manufacturing and high demand for the new product. The overhead expense was $90,000 per
year starting at year 5. Refer to Exhibit B for how the team quantified the overhead expense. The
erosion of the Jell-O contribution margin should be considered in the evaluation since 20% of
Jell-O sales would be eroded by the introduction of the Super Project into the market. Without
the Super Project, there will be no Jell-O erosion. Finally, the allocation for use of the existing
agglomerator capacity should not be considered because this cost should be included in the
previous Jell-O FCF. This facility cost is not an incremental cost to the Super Project.
Capital Budgeting Method Employed
Four Capital Budgeting Techniques were used for analysis of the Super Project: Accounting Rate
of Return (ARR), Payback Period, Net Present Value (NPV), and Internal Rate of Return (IRR).
The four methods were compared against each other, and a summary of the comparison is listed
below.

As per Exhibit C, the ARR for the $200,000 investment over the 10 year period was calculated
to be 49.85%. The ARR for this project has an attractive return. However, the team does not
recommend to use ARR as the capital budgeting technique because it ignores the time value of
money and relevant cash flow information.
As per Exhibit D, the number of periods it takes to recoup the initial investment, the Payback
Period, is approximately 9 years. This is a long time to recoup the investment. Thus, by solely
looking at the Payback Period, the investment does not look valuable. The Payback Period
provides good information, but it is not appropriate in valuing the Super Project.
As per Exhibit E, the graph shows the relationship between the Discount Rate and NPV. When
the Discount Rate increases, the NPV decreases. Hence, when the Discount Rate equals 11.49%,
the NPV subsequently equals 0. Thus, an IRR of 11.49% can be achieved through the Super
Project. We are given that the discount rate is 10%. Since the IRR is greater than 10% it can be
considered a good project. However, there are more appropriate ways to value the Super Project.
Strategic and Competitive Analysis
The Super Project is an attractive investment in terms of how the product aligns with the existing
portfolio, keeps General Foods competitive, and captures the markets demand for desserts.
General Foods is an established household name, producing popular products such as Post, KoolAid, and Jell-O. The Super Project would complement the sugary, dessert-like products already
being sold by General Foods. With General Foods manufacturing expertise and insight into
customer preferences in this segment, they are able to be innovative to extend their boundary to
encompass a new, trendy powdered dessert without drastically interfering with existing sales.
Further, the case highlights the outcome of the Nielsen survey indicating that powdered desserts
were a significant and growing segment of the total dessert market. In fact, powders represent
25.3% of the total market. With this in mind, we see that General Foods has the opportunity to
become a threat to steal market share and encroach the market space that was previously
uncontested by some of its competitors. Therefore, General Foods has the capabilities and
foresight to take advantage of the Super Project by leveraging its existing product line, while at
the same time extending its product boundaries to a segment that aligns with its overall strategy.
The clear benefits to the project include increased cash flow if executed properly. Being an early
mover in an expanding market can be viewed favorably. On the other hand, placing capital in an
unproven market is a tenuous proposition. A reduction in General Foods cash position, plus
damage to the brand could occur if the product isnt widely accepted. While a project naturally
carries some inherent risks when capital is being allocated, we view the benefits of Super
Project, to substantially and unequivocally outweigh the risks involved.
Conclusion
In summary, we recommend General Foods to proceed with the Super Project for two principal
reasons. First, the project has a positive NPV based on the incremental method, thus authorizing
it would be the prudent decision. Second, in terms of complementing General Foods pre-existing
product offerings, the Super Project fits in with the company's overall strategy and would
generate significant value.

Exhibit A. Calculation of Free Cash Flow (in thousands of

Year Year Year Year Year Yea Yea Yea
0
1
2
3
4
r5
r6
r7
288 288 307
Total Net Sales
2112 2304 2496 2688
0
0
2

COGS
Overhead (Exhibit B)
SG&A
Start-Up Costs
Advertising
Erosion of Jell-O

1100 1200 1300 1400

0
0
0
0
0
0
0
0
15
0
0
0
1100 1050 1000
900
180
200
210
220

Total COGS

2395 2450 2510 2520

$)
Yea Yea Yea
r8
r9
r 10
307 326 326
2
4
4

150
0
90
0
0
700
230
252
0

150
0
90
0
0
700
230
252
0

160
0
90
0
0
730
240
266
0

160
0
90
0
0
730
240
266
0

170
0
90
0
0
750
250
279
0

170
0
90
0
0
750
250
279
0

Depreciation (Cum.)
Depreciation

19
19

37
18

54
17

70
16

85
15

98
13

110
12

121
11

131
10

140
9

EBIT (NOP)
Tax on EBIT (52%)
(1-T)*EBIT (NOPAT)

-302
-157
-145

-164
-85
-79

-31
-16
-15

152
79
73

345
179
166

347
180
167

400
208
192

401
209
192

464
241
223

465
242
223

19

18

17

16

15

13

12

11

10

Cash
Receivables
Change in Receivables
Inventories
Change in Inventory
Prepaid and Deferred
Expenses

0
124
124
207
207

0
134
10
222
15

0
142
8
237
15

0
151
9
251
14

0
160
9
266
15

0
160
0
266
0

0
169
9
281
15

0
169
0
281
0

0
178
9
296
15

0
178
0
296
0

Less Current Liabilities

Change in Liabilities
NWC

-2
-2
329

-82
-80
-55

-108
-26
-3

-138
-30
-7

0
185
-47
-23

0
184
1
1

0
195
-11
13

0
195
0
0

0
207
-12
12

0
207
0
0

Depreciation

Cost of Project
(CAPEX)

200

Free Cash Flows

-200

-455

-6

96

204

179

191

203

221

232

Exhibit B. Thoughts and Calculations of Overhead Cost

1) Refer to Appendix F for the Alternative Evaluations of Super Project
2) Recognize that the difference between Alternative II and III is the "overhead expenses and
overhead capital"
3) Calculate overhead using the difference on "profit before taxes": 211-157 = $54,000/yr
4) Alternative III mentions that the overhead "increases were made in year five of the 10-year
evaluation period"
5) Calculate overhead per year starting in year five: $54,000x10/6 = $90,000/yr
6) Refer back to Exhibit A for the Overhead Cash Flow

Exhibit C. ARR (in thousands of $)

(1-T)*EBIT
(NOPAT)
Average Return
Initial
Investment
ARR (Average
Return/ Initial
Investment)

(144.96)

(78.72)

(14.88)

72.96

165.60

166.56

192.00

99.70
200.00
49.85%

Exhibit D. Payback Period (in thousands of $)

Year
0
1
2
3
4
5
6
7
8
9
10

Discounted
Cash Flow

-200
-413.6
-5
3.8
65.6
126.7
101
98
94.7
93.7
89.4

Accumulate
d Cash Flow
-200
-613.6
-618.6
-614.8
-549.2
-422.5
-321.5
-223.5
-128.8
-35.1
54.3

192.48

222.72

223.20

Exhibit E. NPV & IRR Calculation and Graph

FCF
Year

-200
0

-455
1

0.1

0.9091

PVCF

-200
54.3
25
54.3
25
425.
91
295.
96
186.
81
94.8
23
17.0
64
48.8
5
104.
9
152.
6
193.
3
228.
1
257.
9
283.
5
305.
4
324.
3
340.
4
354.
3
366.

-413.6

NPV
Discount
Rate/NVP
0.03
0.05
0.07
0.09
0.11
0.13
0.15
0.17
0.19
0.21
0.23
0.25
0.27
0.29
0.31
0.33
0.35

-6
2
0.82
64
4.95
9

5
3
0.75
13

96
4
0.68
3

204
5
0.62
09

179
6
0.56
45

191
7
0.51
32

203
8
0.46
65

221
9
0.42
41

232
10
0.385
5

3.75
66

65.5
69

126.
67

101.
04

98.0
13

94.7
01

93.7
26

89.44
6

0.37
0.39
0.41

2
376.
4
385.
1
392.
5

Exhibit F (Obtained from Case)