General Foods Case Study

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General Foods (GF) is in the process of evaluating Super as a new profit-increasing project for its business. Payback and Return on Funds Employed (ROFE) are the decision rules used currently by GF for project decisions. While these rules are helpful, they are flawed and do not take into account the time value of money when evaluating cash flows. Net present value is a more suited tool to evaluate projects because it takes into account discounting of future cash flows, evaluates liquidity through discount, selects the scenario that maximizes shareholder wealth, and considers all relevant incremental cash flows. Certain cash flows and costs for Super were either included or not in the financial worksheets presented to management. Flaws…show more content…
In the case of Super, Sanberg argues that other costs outside of these incremental cash flows need to be considered to properly evaluate the project. These included additional overhead costs and the allocation of equipment charges due to the shared use of the Jell-O agglomerator for Super production. Both of these additions are irrelevant to the evaluation of Super. The overhead charges were agreed to by management and whether or not the project is accepted or rejected will be the same in both cases. Management recognized a need to increase sales force due to changing complexity and growth in the market, but this would not change regardless of project decision. Allocation of equipment costs from the Jell-O agglomerator are also irrelevant because while Super benefits from the equipment already being available, it was purchased for Jell-O. It is not stated what additional projects could run on the agglomerator besides Super and Jell-O, so there is not an opportunity loss of other products not running on this equipment to take into…show more content…
An amount of $294,760 was calculated, signaling that the project should be accepted. A sensitivity analysis was then performed which examined the effect of discount rate, tax rate, revenue growth or decline, and fluctuation in erosion cost on NPV. Revenue was found to have a significant effect on overall NPV. A decline in projected revenue for Super of approximately 3.55% put the project NPV at zero. This equates to a dollar amount of approximately $79,200 in revenue for the first year and a continued decrease in sales for the remaining 10 years of an equal

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