Supercase

The Super Project

Relevant Incremental Cash Flows

In order to evaluate the profitability of the Super Project, we decided to calculate the NPV of the Super Project. However, comparing with calculating NPV by adding discounted cash flows together, screening relevant cash flows is a more intuitive work. In addition to including direct investment to and expected profit from the Super Project, we treat other cash flows as below:

(a) Test Market Expense: Excluded

The expense had already occurred by the time of case, so General Foods could project the future sales and revenues of Super. Thus, we considered it “sunk cost”.

(b) Charges for the Use of Building and Agglomerator Capacity: Excluded

The facilities had already been built by the time of the case, and therefore the value of the facilities should not be treated as part of upfront investment. Furthermore, while the Super Project would clearly incur opportunity costs by occupying the capacity allocated to Jell-O otherwise, such costs are included as below.

(c) Erosion of Jell-O Profits: Included

By producing and selling Super with existing facilities, General Foods must forgo the profits from producing and selling Jell-O with the same facilities. Therefore, we definitely should include the erosion of Jell-O profits in our NPV calculation.

(d) Overhead Expenses: Included

According to the case material, the growth of the Super Project would inevitably result in more fixed costs and facilities from Year 5 (lasting 6 years totally). In addition to the $200 upfront investment, we must incorporate every subsequent investment that would happen within the time horizon into the calculation.

As the methods of Alternative II and III differ only in the treatment of overhead expense, the annual before-tax overhead expense is determined by dividing the difference in aggregate pre-tax profit of Alternative II and Alternative III by 6, which is:

(211 – 157) * 10 / 6 = $90/Yr

Super’s Profitability

Based on the scenario...