The Super Project Case Study

General Foods Corporation is an organization that manufactures consumer food products. The corporation is "organized along product lines in the United States," including Post, Kool-Aid, Maxwell House, Jell-O, and Birds Eye. Their customers are retail consumers.

The Super Project presented General Foods management with the possibility to introduce a new dessert product, named Super, into the market. The dilemma management faced was how to appropriately measure and allocate costs associated with the project, as well as, whether to accept or reject the project based on costs and future cash flows generated by Super. With regard to The Super Project or any capital budgeting decision, time value of money concepts are central to financial decision making. 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, 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. The use of an accounting rate of return also underscores a project's