The Super Project
The manager of financial analysis at General Foods Corporation questions the suitability of the company’s capital
budgeting system in evaluating a proposal to introduce a major new product. The present system ranks projects according to
payback period and accounting rate of return. The manager believes that several costs that are omitted from the analysis in
the present system should be included in assessing the attractiveness of the proposed investment.
This case outlines the capital budgeting system in use at General Foods in 1967 and provides opportunities to:
- identify the key assumptions needed to calculate the relevant cash flows from a project;
- specify correctly the relevant cash flows utilizing these assumptions;
- test the sensitivity of a project’s returns against the assumptions utilized in determining the relevant cash flows;
- assess the usefulness of various techniques used to measure the attractiveness of the Super Project.
- What are the relevant cash flows for General Foods to use in evaluating the Super Project? In particular, show should
management deal with issues such as:
- test-market expenses
- overhead expenses
- erosion of Jell-O contribution margin
- allocation of charges for the use of excess agglomerator capacity.
- How attractive is the investment as measured by various capital budgeting techniques (i.e. accounting rate of return,
payback period, internal rate of return, net present value)?
- How attractive is the Super Project in strategic and competitive terms?
- What potential risks and benefits does General Foods incur by either accepting or rejecting the project?
- Should General Foods proceed with the Super Project? Why or why not?