The Super Project Case Study

Free cash flows of the project for next five years can be calculated by adding depreciation values and subtracting changes in working capital from net income. In 2010, there will be a cash outflow of $2.2 million as capital expenditure. In 2011, there will be an additional one time cash outflow of $300,000 as an advertising expense. Using net free cash flow values for next five years and discount rate for discounting, NPV for the project comes out to be $2907, 100. The rate of return at which net present value becomes zero i.e.

Team then commenced to apply some of the budgeting concepts discussed in class. First, NPV was calculated using the NPV function in Excel - approximately $419,000. In this calculation we found NPV to be a positive number thus indicating that the Super Project investment should be pursued by General Foods.

Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.

Super Project will eat into the Jell-O Sales and this must be taken as a cost for the project when making the final decision.

In this analysis, we included the overhead expense for 1972-1977 because as the project begins to gain a foothold in the market it will acquire a larger market share and will become a larger portion of General Foods’ overall dessert sales. Also, the agglomerator and excess capacity was charged

The increase in partnership with The Regional Food Bank expands the pantry’s scope of aid by allowing them to house large quantities of food. The food is purchased at an even more (than previously) reduced rate. In the event of a natural disaster, Food Resource Centers house food and are ready to meet the needs of the community. In order to become a Food Resource Center, Project 66 needed a larger and permanent building.

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

General Mills (NYSE:GIS), our company, is a global consumer foods company. We develop distinctive value-added food products and market with our unique brand names. We work continuously to improve our established products and to create new products that meet our customers’ potential needs and preferences. Our company has $14.88 billion in sales last year. Our sales has grown substantially throughout the years due in large part to our popular brand names, this however is only part of the reason that we has been so successful. We markets global brands such as Green Giant, Old El Paso, Häagen-Dazs, Yoplait, Cheerios, Betty

What are the relevant cash flows for General Foods to use in evaluating the Super project? In particular, how should management deal with issues such as:

Although CarHome project can generate positive free cash flow, it offers negative net present value (NPV) when discounted at weighted average cost of capital. This means that the shareholders’ wealth could not be maximised by accepting the project. In general, the company prefer shorter payback period. The discounted payback period of the project is 10.6 years, which is highly above the expected cut-off period of 6 years. On top of that, internal rate of return (IRR) is around 12% - 12.5%, which is below the weighted average cost of capital of 13.24% (as hurdle rate). The business managers are risk averse in nature. They prefer less risk to more risk for a given level of expected return (Pike et al, 2012). Consequently, it is too risky for

In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this

The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.

In fully investigating all of our calculations we are fully invested in using the Net Present Value figures we calculated as a means of ranking the eight projects. In doing so we found reasons in which why the Net Present Value was our benchmark for ranking the projects and why we did not use the Payback Method. The Payback Method ignores the time value of money, requires and arbitrary cutoff point, ignores cash flows beyond the cutoff date, and is biased against long-term projects, such as research and development and new projects. When comparing the Average Accounting Return Method to the Net Present Value method we found that the Average Accounting Return Method is a worse option than using the Payback Method. The Average Accounting Return Method is not a true rate of return and the time value of money is ignored, it uses an arbitrary benchmark cutoff rate, and is based on accounting net income and book values, not cash flows and market values. Plain and simply put, the Net Present Value method is the best criterion to use when ranking these eight

NPV and IRR: When examining the NPV and the IRR of the Merseyside project, the numbers were very attractive. It had a positive net present value and an IRR above 10 percent. By these numbers, along with others,

This report will firstly evaluate the usefulness and limitations of the two investment appraisal methods, including the Payback and Net Present Value (NPV). Secondly the report will review historical financial information. Thirdly discuss the financial issues of debt and equity. Finally the report will provide recommendations of how the company’s investment should be finance.