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Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
Harvard Business Case - Super Project
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Harvard Business Case - Super Project

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Our approach to Super Project, Harvard Business Case

Our approach to Super Project, Harvard Business Case

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  • MBA Valuation Week 1
  • Transcript

    • 1. Valuation Assignment 1The Super ProjectGulcin AskinMichelle DonovanKivanc OzuolmezPeter Tempelman
    • 2. Question IHow should management deal with...
    • 3. How should management deal with Test-market expenses Overhead expenses Erosion of Jell-O contribution margin Allocation of charges for the use of excess agglomerator capacity
    • 4. Test Market Expenses- Should only be taken into account if they can be attributed to the particular project.- In the Super case these expenses had been made before the Super project had started (p.2)- Conclusion: Test-market expenses will not be taken into account in the FCF
    • 5. How should management deal with Test-market expenses Overhead expenses Erosion of Jell-O contribution margin Allocation of charges for the use of excess agglomerator capacity
    • 6. Overhead Expenses- Should be taken into account if these expenses can be attributed to the project.- In the Super case, overhead expenses have been justified earlier in the Jello-O project. Also, the data does not provide specific information on incremental overhead expenses.- Conclusion: Overhead expenses will not be taken into account in the FCF
    • 7. How should management deal with Test-market expenses Overhead expenses Erosion of Jell-O contribution margin Allocation of charges for the use of excess agglomerator capacity
    • 8. Erosion of Jell-O- Erosion of Jell-O contribution margin should be taken into account. Super is expected to displace part of the sale of Jell-O (p.2/exhibit 6)
    • 9. How should management deal with Test-market expenses Overhead expenses Erosion of Jell-O contribution margin Allocation of charges for the use of excess agglomerator capacity
    • 10. Excess Agglomerator CapacityAgglomerator?
    • 11. Excess Agglomerator Capacity- Allocation of charges for excess capacity should be taken into account if they can be attributed to the particular project.- However, General Foods Corp. Has already counted these costs (probably in the FCF of Jell-O), so management should not take these charges into account for the Super FCF.(If we wanted to evaluate the Super project, the capital expenditure of the agglomerator would be needed and used to calculate the Super FCF.)
    • 12. How should management deal with Test-market expenses Overhead expenses Erosion of Jell-O contribution margin Allocation of charges for the use of excess agglomerator capacity
    • 13. Note for management- The allocation of charges for excess capacity is not counted in the FCF of the Super project.- However, these charges represent opportunity costs for the Jell-O division and/or future projects.- We recommend HQ to take these costs into account on a corporate level.
    • 14. Question IIComments on evaluation approaches
    • 15. Incremental Basis / Alternative I- This evaluation approach is the correct approach. In the capital budgeting process only incremental cash flows are taken into account.- The Jell-O facilities and production capacity are not relevant for the Super FCF because they have already been counted.- Therefore the incremental basis is the correct evaluation approach.
    • 16. Facilities-Used basis andFully Allocated / Alternatives II & III- These evaluation approaches are incorrect approaches. In the capital budgeting process only incremental cash flows are taken into account.- The Jell-O facilities and production capacity are not relevant for the Super FCF because they have already been counted.- Therefore, it is incorrect to include Jell-O facilities and production capacity into the Super project FCF.
    • 17. Question IIIValuation of the Super Project
    • 18. Starting Points- Discount rate is 11%- FCF concerns a 10 year time scale- Depreciation continues for a longer period- Tax rate: 52% (exhibit 6)- Prespecified period for payback rule; no more then 10 years.
    • 19. Free Cash Flow Tax 52% R1 11% T0 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 0 1 2 3 4 5 6 7 8 9 10 - 200.00CAPEX - 19.00 - 18.00 - 17.00 - 16.00 - 15.00 - 13.00 - 12.00 - 11.00 - 10.00 - 9.00Depreciation 104.00 9.88 9.36 8.84 8.32 7.80 6.76 6.24 5.72 5.20 4.68Tax over DepreciationNet sales 2,112.00 2,304.00 2,496.00 2,688.00 2,880.00 2,880.00 3,072.00 3,072.00 3,264.00 3,264.00 - 1,100.00 - 1,200.00 - 1,300.00 - 1,400.00 - 1,500.00 - 1,500.00 - 1,600.00 - 1,600.00 - 1,700.00 - 1,700.00COGS - 1,100.00 - 1,050.00 - 1,000.00Advertising Expense - 900.00 - 700.00 - 700.00 - 730.00 - 730.00 - 750.00 - 750.00 - 15.00Start up cost 54.00 196.00 388.00 680.00 680.00 742.00 742.00 814.00 814.00Income (EBIT) - 103.00 - 49.44 25.92 94.08 186.24 326.40 326.40 356.16 356.16 390.72 390.72Income after taxJello Erosion - 180.00 - 200.00 - 210.00 - 220.00 - 230.00 - 230.00 - 240.00 - 240.00 - 250.00 - 250.00 - 93.60Tax over Erosion - 104.00 - 109.20 - 114.40 - 119.60 - 119.60 - 124.80 - 124.80 - 130.00 - 130.00 - 86.40 - 96.00Erosion after tax - 100.80 - 105.60 - 110.40 - 110.40 - 115.20 - 115.20 - 120.00 - 120.00 55.00 3.00 7.00 23.00 - 1.00 - 13.00 - 12.00NWC - 329.00 0.00 0.00 - 96.00 - 5.72 5.12 95.96 246.80 221.76 234.20 246.68 263.92 275.40Total Cash Flow After Tax - 454.96
    • 20. Free Cash Flow Tax 52% R1 11% T0 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 0 1 2 3 4 5 6 7 8 9 10 - 200.00CAPEX Net sales + COGS +Depreciation - 19.00 - Advertising Expense +- 18.00 - 17.00 - 16.00 15.00 - 13.00 - 12.00 - 11.00 - 10.00 - 9.00 104.00 9.88 9.36 Start 8.84 cost 8.32 up 7.80 6.76 6.24 5.72 5.20 4.68Tax over DepreciationNet sales 2,112.00 2,304.00 2,496.00 2,688.00 2,880.00 2,880.00 3,072.00 3,072.00 3,264.00 3,264.00 - 1,100.00 - 1,200.00 - 1,300.00 - 1,400.00 - 1,500.00 - 1,500.00 - 1,600.00 - 1,600.00 - 1,700.00 - 1,700.00COGS Tax over Depreciation + - 1,100.00 - 1,050.00 - 1,000.00Advertising Expense Income after tax + - - 900.00 700.00 - 700.00 - 730.00 - 730.00 - 750.00 - 750.00Start up cost - 15.00 Erosion after tax + NWC 54.00 196.00 388.00 680.00 680.00 742.00 742.00 814.00 814.00Income (EBIT) - 103.00 - 49.44 25.92 94.08 186.24 326.40 326.40 356.16 356.16 390.72 390.72Income after taxJello Erosion - 180.00 - 200.00 - 210.00 - 220.00 - 230.00 - 230.00 - 240.00 - 240.00 - 250.00 - 250.00 - 93.60Tax over Erosion - 104.00 - 109.20 - 114.40 - 119.60 - 119.60 - 124.80 - 124.80 - 130.00 - 130.00 - 86.40 - 96.00Erosion after tax - 100.80 - 105.60 - 110.40 - 110.40 - 115.20 - 115.20 - 120.00 - 120.00 55.00 3.00 7.00 23.00 - 1.00 - 13.00 - 12.00NWC - 329.00 0.00 0.00 - 96.00 - 5.72 5.12 95.96 246.80 221.76 234.20 246.68 263.92 275.40Total Cash Flow After Tax - 454.96
    • 21. Free Cash Flow Tax 52% R1 11% T0 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 0 1 2 3 4 5 6 7 8 9 10 - 200.00CAPEX - 19.00 - 18.00 - 17.00 - 16.00 - 15.00 - 13.00 - 12.00 - 11.00 - 10.00 - 9.00Depreciation 104.00 9.88 9.36 8.84 8.32 7.80 6.76 6.24 5.72 5.20 4.68Tax over DepreciationNet sales 2,112.00 2,304.00 2,496.00 2,688.00 2,880.00 2,880.00 3,072.00 3,072.00 3,264.00 3,264.00 - 1,100.00 - 1,200.00 - 1,300.00 - 1,400.00 - 1,500.00 - 1,500.00 - 1,600.00 - 1,600.00 - 1,700.00 - 1,700.00COGS - 1,100.00 - 1,050.00 - 1,000.00Advertising Expense - 900.00 - 700.00 - 700.00 - 730.00 - 730.00 - 750.00 - 750.00 - 15.00Start up cost 54.00 196.00 388.00 680.00 680.00 742.00 742.00 814.00 814.00Income (EBIT) - 103.00 - 49.44 25.92 94.08 186.24 326.40 326.40 356.16 356.16 390.72 390.72Income after taxJello Erosion - 180.00 - =NPV(R1,y1:y10)+y0 200.00 - 210.00 - 220.00 - 230.00 - 230.00 - 240.00 - 240.00 - 250.00 - 250.00 - 93.60Tax over Erosion - 104.00 - 109.20 - 114.40 - 119.60 - 119.60 - 124.80 - 124.80 - 130.00 - 130.00 - 86.40 - 96.00 WhileErosion after tax the discount rate = 11% - 100.80 - 105.60 - 110.40 - 110.40 - 115.20 - 115.20 - 120.00 - 120.00 NPV $241.47 55.00 3.00 7.00 23.00 - 1.00 - 13.00 - 12.00NWC - 329.00 0.00 0.00 - IRR96.00 18.33% - 5.72 5.12 95.96 246.80 221.76 234.20 246.68 263.92 275.40Total Cash Flow After Tax - 454.96 =IRR(y0:y10)
    • 22. Free Cash FlowPayback?
    • 23. Conclusion NPV $241.47 IRR 18.33% Payback 7 years- NPV is positive- IRR is higher than discount rate. IRR is usable because negative cashflows proceed positive cashflows- Payback is 7 years. This is shorter than the General Foods’ prespecified payback period of 10 year.- Team Utrecht recommends: do the investment

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