7/18/2019 Super Project

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Corporate Finance – FINC-GB.2302.70 Anjolein Schmeits 

The Super Project

Team: David Knapp, Andrew Petrozziello, Carlo Nardone, Cheng Shen, Ge Wu, Ankit ehta

Based on financial analysis of the Super Project and General Foods Corporation criteria (illustrated in

exhibit 3), we recoend that Global Foods Corporation ust proceed with the project for reasons

explained below! Super food project was subjected to financial e"aluation as per General Food s

Corporation in"estent analysis process!

Per the financial analysis fro F#$%& throu'h F#$, followin' in"estent easures were deterined

General Foods Corporation ust accept the Super project as the Net present value for the Super Project

is a positi"e *+#!& illion, with cost of capital at #-.! Super project will thus increase the fir "alue

and subse/uently the shareholder "alue.Internal rate of return is 27.4% (0xhibit #) is 'reater than the cost of capital of #-. to General Foods

Corporation! 1hus, General Foods Corporation ust accept the project! 2nternal rate of return can be

artificially hi'h if the projects are shorter or if the initial cash flows are hi'her!

Accounting rate of return  for the super project based on #-year a"era'e is 3-!+$. (post taxes)!4ccountin' rate of return are coputed by di"idin' a"era'e after tax profits (*##% illion) by a"era'e

in"ested capital (*3&- illion)! 4ccountin' rate of return is based on accountin' profits and does not ta5e

into account the tie "alue of oney!(Discounte! Pa"#ac$ Perio for the super project is %!&3 years! General Foods Corporation will ta5e

%!&3 years of noinal cash flows to reco"er the initial outlay of the project!

Criteria for 0"aluatin' Projects by General Foods Corporation

Based on the criteria, Super is classified as profit increasin' projects! 0stiates of paybac5 period and

return on funds eployed are re/uired for this project based on its initial outlay! Projects with a paybac5 

 period of upto #- years and a #- year return on funds as low as -. PB1 (profit before taxes) areconsidered worthy of consideration!

is$ an &enefits of the Super Project

'eneral oos )#jective* 1o find 'ood solid projects to eploy capital at an attracti"e return on

in"estent! 1he rate of capital inputs ust be balanced a'ainst a steady 'rowth in earnin's per share! 1he

5ey to General Foods Corporation capital bud'etin' is to inte'rate the plans of & di"isions into balanced

copany plan which eets o"erall 'rowth objecti"e!

&enefits* 

• 4 super food, a new instant dessert, doubles the powered dessert business cate'ory6 it increases

the 7i"ision business by #-. by capturin' #-. share of total dessert ar5et!

• 2f accepted, increental in"estent is low, as Super will utili8e existin' buildin' and a"ailable

excess a''loerator capacity, thus axii8in' resource utili8ation!

• &-. of sales of Super "olue would coe fro 'rowth in total ar5et share or 'rowth in

 powders se'ent and only reainin' -. fro Cannibali8ation of its existin' product!

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7/18/2019 Super Project

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Corporate Finance – FINC-GB.2302.70 Anjolein Schmeits 

• 4s per the forecast, Super project exhibits net loss in first three years and profits in followin'

years, howe"er 'eneral foods are bi' enou'h to introduce new products without showin' a loss!

is$s* 

• 4s a result of Super project, there is an opportunity loss of existin' facilities, as new facilities

ust be built to accoodate future General Foods expansion! 4s General Food9s businessexpands, Super utili8es facilities that are adaptable to alternati"e uses in an expandin' business.

• :ith future 'rowth and expansion, Super project will re/uire uch lar'er in"estents to eet

hi'h "olue deand as current infrastructure will not be able to meet lon term !eman!s

"or the pro!#ct.

• 2f ;ell< product deand increases si'nificantly in short ter, it will ipact production capacity

of the Super!

• 2f General Foods reject the Super Project, a copetitor product can capture the dessert ar5et

share and also potentially erode ;ell<9s earnin's!

=ele"ant cash flows for General Foods to use in e"aluatin' the Super Project are aftertax increental project cash flows based on >withorwithout? capital bud'etin' ethod! Followin' assuptions were

ade in financial analysis of the Super Project

#! +apital e,peniture of *-- illion was expensed at tie 8ero i!e! F#$%&!! Test -ar$eting e,pense of *3%- illion was added bac5 to the 0B21 as it is sun5 cost! Cash

flow associated with sun5 cost should not be considered for capital bud'etin' as they are not

increental and cannot be reco"ered! Sun5 costs are past and irre"ersible cash outflows and thus

cannot affect the decision to accept or reject a project!3! )verhea e,penses of *@+ illion (difference of profit before taxes between Facilities used

 bases and fully allocated) directly related to the Super project ust be considered for capital

 bud'etin'! <"erhead costs include anufacturin' costs, plus sellin' and 'eneral and

adinistrati"e costs on a per unit basis and are subtracted fro the increental re"enue!

<"erhead capitals also include a share of the distribution syste assets!4. Allocation of charges for the use of e,cess agglo-erator capacit" was not included in the

capital bud'etin'! 0xcess a''loerator capacity is already accounted in the production of ;ell<!

Per the case, there is no current alternati"e use of the excess ;ell< a''loeerator capacity and

thus there is 8ero opportunity cost!$. rosion of /ell0) contri#ution -argin has been included in the capital bud'etin' as  these are

classified as incidental effects or side costs! :hile deterinin' future cash flows it is iportant to

consider project9s effect on the fir9s business! 7eand for the Super will cannibali8e existin'

;ell< sales! 1his incidental effect needs to be factored into the increental cash flows!

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