Super Project

This issue surrounding General Foods Corporation is that they want to expand to offer a new instant dessert, based on water soluble, agglomerated powder. General Foods hopes that the introduction of this dessert called Super, will help it to gain more market share in the dessert industry. It seems like taking on the Super project is very promising and will pay off in the future, however the NPV must be calculated to determine if this truly is a project worth taking on. One assumption for this case is that all the number s in Exhibit 6 are based off incremental basis calculations because incremental cash flows go hand in hand with capital budgeting. A second assumption is that we are evaluating the project as if there is no debt. We can also assume that the WACC for General Foods is 10% and that General Foods is a profitable company that receives tax benefits.

I think that the money that General Foods already spent on test marketing the product represents a sunk cost because the money has already been spent and there is no way to recover it in the future. The money spent to test market the product should not be included in the calculation of cash flows since it is a sunk cost. When evaluating Super Project, overhead expenses should also be taken into account because of the fact that the firm wants to increase its market share so drastically. With rapid expansion the firm will need additional resources to be able to keep up with demand. I think that General Foods should account for the erosion of the Jell-O margins because this represents an incremental cost of the project and it is likely that Jello-O sales will have significant changes. Because it is assumed that Jell-O sales will take a hard hit from erosion of sales, the table represents a negative cash flow for erosion of Jell-O sales and of course erosion after tax. The erosion of sales is unlikely due to competition and the fact that introducing Super on to the market plays so heavily in to