Submitted by: Submitted by maggie1304
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Category: Business and Industry
Date Submitted: 02/10/2011 11:25 PM
Super Project
Overview
In the case “super project”, General Food adopt the incremental basis accounting method and use ROFE (Return on funds employed?) as the KPI to evaluate the attractiveness of the project. Though the analyst put up several alternatives, all the approach neglect the time value of money and provide wrong calculation in terms of the market test expense, existing excess capacity and etc. Our proposal will re-evaluate the whole project based on the NPV method to provide a more comprehensive view of the project.
P&L Analysis of the Project
Before we calculate the NPV of the project, we forecast the 10 year period P&L for super project based on the current investment and sales forecast in the following 10 period. For the convenience, we assume that each period is the lunar year. Year 0 represent 1967 and assume General Food has finished all the initial investment by year end. Year 11 represents the additional period in which, we assume we will sell the initial investment and get the salvage value.
1. The total revenue will be composed of the net sales of Super and the salvage value of the packaging machine. All the numbers come from GF’s analysts’ sales forecast and depreciation method they adopted in the case. We assume after 10 years, we will have upgraded business for the market and quit by selling the packaging machine.
2. After the Super is in production, we assume it has expensed part of the overhead in the company according to the matching principle. Based on 1967’s total overhead in the GF and Super’s share, we assume the annual overhead for Super in year 1 is 45 and continues to growth in accordance with the growth of sales.
3. The startup cost is considered to be the initial investment with another 200 investment in building modification and new packaging line. The test market fee is the sunk cost and will have no future value, we will not include it in our calculation.
4. According to the past P&L report, we can infer that the tax...