Super ProjectThis 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.
A note to the reader: We do not want the same level of capital flow-ups in the NPV as is expected due to the increased investment in cash.
There is some talk recently about a future deal for General Foods to buy out WACC.
A comment in the Wall Street Journal regarding the NPV:
The idea for the deal would seem to involve a combination of a restructuring with a reversion to business model, and the creation of a new company. All of a sudden there would be another new company, that which would have some additional cash. It would require some other kind of reversion to the business model, and the reversion would have to be a business model that, again, will allow for new revenue (and revenue won’t be as bad as the original business model would).
So, when has this ever happened? For the time being it’s going to happen, but it’s a very long game. We are not expecting this to happen, only to happen in a short space of time. But, please remember, this is being discussed and some say this may come as a surprise. Here is an email I will email you to explain why this is being talked about in WSJ, to let you know why it’s happening:
To start the discussion, let me clarify that the NPV issue is never a problem for General Foods. The NPV was discussed by Robert Kincaid for a conference in April 2002, and not for the purchase price of General Foods. In fact, when Kincaid brought an investor proposal to General Foods, some people at General Foods thought that he was going to just give us a little more time to discuss this issue. That’s why in February of 2002, I told John Ritchie, one of the chief executives at General Foods, that we were going to take this to the end of 2002.
In the case of that proposal, which General Foods presented to the Committee on Financial Markets and the Federal Reserve Board, General Foods was in no way tied to it and would not have had to issue the contract with Kincaid. Nor would the proposed purchase price from Kincaid be. What matters is that Kincaid is a good man who would want to give General Foods the best possible pricing for its product.
Asking General Foods to develop a similar proposal was not an interesting conversation in the business press on the way that Kincaid’s proposal appeared and I think it’s interesting nonetheless. I don’t want General Foods to buy this to be a short-term deal. I would hope that the price of a company’s stocks would drop, but the fact remains that there are a few things that remain to be sorted out between General Foods and Kincaid.
First, the NPV should be taken into account.
The NPV issue is not about General Foods. It’s about the future of the General Foods industry. This is important because there is huge potential in this industry if the market for liquid fruits and vegetables is expanded. General Foods could grow, or it could lose, because of its size. General Foods could sell a lot of solid vegetable varieties. General Foods could do something about the size and cost of all its seeds, but it also could run into other issues. General Foods couldn’t make all her eggs and milk in a year, for example. That could affect her ability
A note to the reader: We do not want the same level of capital flow-ups in the NPV as is expected due to the increased investment in cash.
There is some talk recently about a future deal for General Foods to buy out WACC.
A comment in the Wall Street Journal regarding the NPV:
The idea for the deal would seem to involve a combination of a restructuring with a reversion to business model, and the creation of a new company. All of a sudden there would be another new company, that which would have some additional cash. It would require some other kind of reversion to the business model, and the reversion would have to be a business model that, again, will allow for new revenue (and revenue won’t be as bad as the original business model would).
So, when has this ever happened? For the time being it’s going to happen, but it’s a very long game. We are not expecting this to happen, only to happen in a short space of time. But, please remember, this is being discussed and some say this may come as a surprise. Here is an email I will email you to explain why this is being talked about in WSJ, to let you know why it’s happening:
To start the discussion, let me clarify that the NPV issue is never a problem for General Foods. The NPV was discussed by Robert Kincaid for a conference in April 2002, and not for the purchase price of General Foods. In fact, when Kincaid brought an investor proposal to General Foods, some people at General Foods thought that he was going to just give us a little more time to discuss this issue. That’s why in February of 2002, I told John Ritchie, one of the chief executives at General Foods, that we were going to take this to the end of 2002.
In the case of that proposal, which General Foods presented to the Committee on Financial Markets and the Federal Reserve Board, General Foods was in no way tied to it and would not have had to issue the contract with Kincaid. Nor would the proposed purchase price from Kincaid be. What matters is that Kincaid is a good man who would want to give General Foods the best possible pricing for its product.
Asking General Foods to develop a similar proposal was not an interesting conversation in the business press on the way that Kincaid’s proposal appeared and I think it’s interesting nonetheless. I don’t want General Foods to buy this to be a short-term deal. I would hope that the price of a company’s stocks would drop, but the fact remains that there are a few things that remain to be sorted out between General Foods and Kincaid.
First, the NPV should be taken into account.
The NPV issue is not about General Foods. It’s about the future of the General Foods industry. This is important because there is huge potential in this industry if the market for liquid fruits and vegetables is expanded. General Foods could grow, or it could lose, because of its size. General Foods could sell a lot of solid vegetable varieties. General Foods could do something about the size and cost of all its seeds, but it also could run into other issues. General Foods couldn’t make all her eggs and milk in a year, for example. That could affect her ability
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