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Super Project Case
1.
The relevant cash flows for General Foods are the following: sales and cost of goods sold for the Super
project, erosion of Jell-O contribution margin, selling expenses, income tax, capital expenditures,
opportunity costs for using excess agglomerator capacity, and increases in the net working capital.
a. Test-market expenses, which were included in the first period, are sunk costs because they had
been already expensed for feasibility of the Super project. Therefore, the management should not
include the test-market expenses into calculation of the cash flows.
b. The management did not include the overhead costs into the calculations, but the managerfinancial
analysis proposed to embrace the costs in Alternative 3. However, the management
should not include overhead expenses because overhead expenses affect many areas of the
business and are not attributable to a particular business activity. Only additional overhead
expenses that arise of the decision to take a project should be added.
c. As sales of the Super project displace sales of Jell-O, the management should add, and it actually
added, the erosion of Jell-O contribution margin to the cash flows.
d. As the firm plans to use the existing facilities for launching the Super project, it should deduct
from the cash flows the opportunity cost of using the facilities because the management might
have used the facilities in a best alternative way. For example, the management might have
rented or sold the existing unused facilities or it might have produced the existing or new product
using the facilities.
2.
There are three evaluation approaches suggested to evaluating capita ...