THE SUPER PROJECT
What are the relevant cash flows?
Net initial investment:
- Initial machine investment (building modifications + equipment)
- Working capital investment (cash + receivables + inventories + less current liabilities)
Cash flow from operations
(Appendix.1)
How attractive is the investment?
The new product is potential to increase General Foods' sales and earning power for many years in the future.
With the incremental costs and investment, the investment looks very attractive because Super will use the same machine as Jell-O. It would use a share of the excess capacity of Jell-O which is temporarily unused. So, the incremental cost of Super would be low. However, for a long term period, the Super project would not seem attractive anymore if the excess of Jell-O capacity did not exist. Super will disturb the production of Jell-O and need another machine investment to produce its own product.
Super was expected to get a 10% share of the total dessert market. Unfortunately, it would get the 20% of the expected share market from the erosion of Jell-O sales.
How did we evaluate the investment?
By calculating the payback period for Super project. The estimation resulted 6.83 years for the Super project to payback.
By using three alternatives in calculating the ROFE of Super. First, incremental basis which is only considered the incremental revenue and investment. With this alternative, Super would not be charged with the 'opportunity loss" of agglomerating capacity and building space. The incremental basis resulted a 7 years payback period and 63% of ROFE. Second, facilities-used basis which is added the Super's pro rata share of existing agglomerator and existing building to the incremental capita ...