Super Project

In 1967 General Foods Corporation was a large, quickly growing corporation and they were actively looking for new projects in which they could invest their capital in. They were looking to increase their share of the dessert market. Currently the company is studying a proposal of whether or not to accept a new project for producing instant dessert (Super project), among many other projects. Some other major products from General Foods included Post, Kool-Aid, Maxwell House Coffee, Jell-O and Birds Eye. The financial analyst for the company, Mr. Sanberg, was interested in the Super project because the market for powdered desserts has showed noticeable growth compared with other desserts in the market. The market share for the powdered desserts had increased by 7.6 from 1965 to 1966. This growth in the market was one of the reasons that the company felt it was important to perform a capital budgeting analysis on the Super project in order to be aware of the consequences of the project.

The company had established financial policies and procedures for evaluating all new capital projects requesting greater than $50,000 in capital. Therefore, new projects would be examined in order to determine how they will increase the profit, improve the quality, and increase the capacity of the production process for the new product and existing products. For this reason, the controller of the corporation, Mr. Kresslin, was concerned about the aggregate benefits that the corporation would obtain by performing the Super project.

The original request for the Super project was $200,000 which would be used for purchasing new packaging equipment and building space for the Super project. The original analysis using the incremental method showed the expected pay back period for this project to be 6.83 years, which means that the project is expected to repay its original investment 6.83 years from acceptance of the project. In addition, the Super project is expected to use 2/3 of a building used for production of Jell-O half of the agglomerator machine, which is also used in production of Jell-O. Therefore, there would be a significant difference in the return on investment if the company decided to include the opportunity loss of using the agglomerator and the Jell-O building, when analyzing the Super project. This case represents a managerial decision situation, where the manager studies the proposed project from different perspectives in order to make the right decision that will improve the performance of the corporation.

The decision that needs to be drawn for this case involves capital budgeting, and deciding which costs should be associated with the project. General Foods current policy is to use the incremental basis when analyzing projects, which takes into account expenses directly attributable to the project. Following you will find an analysis of the economic and industry data, analysis of the alternatives available and the group's recommendation for the Super project.

II. Analysis of Economic and Industry Data

The time period in the Super Project case was 1967, which was near the beginning of the period known as the Vietnam War era. Large numbers of U.S. combat troops began to arrive in Vietnam in 1954 and were disengaged in 1973. The war subsequently ended in 1975 unsuccessfully. In November 1963 Kennedy was assassinated and was automatically succeeded by Vice President Lyndon B. Johnson (1963-1969). In 1969 Richard Nixon became president and his policy was to slowly disengage from the war.

The economic horizon in 1967 looked optimistically bright with tremendous economic prosperity in the future. In 1967 inflation was near an all time low and inflation remained relatively low until the mid 1970's and early 1980's. Unemployment was also near an all time low in 1967. From 1950 to 1980, the U.S. population increased by 50% according to Census Data which affects food demand and this is a very important note because personal consumption expenditures also increased accordingly. According to the Economic Report of the President, Gross Domestic Product increased quite substantially during the period of the 1960's. According to the attached exhibit, Non-durable goods increased anywhere from 1.5% to 5.5% every year during that period from $152 billion in 1960 to $253 billion in 1969. The Annual Report for General Foods in 1967 states the company set new highs in net earnings, net sales, physical volume of product sold, and dividends paid. For 15 years in a row General Foods recorded increases in net sales and net earnings during fiscal year 1967.

Post Cereal acquired Jell-O Gelatin Company in 1925, and Bakers Chocolate in 1927, Maxwell House coffee in 1928, and other food brands, then changed its name to General Foods Corporation in 1929. Mergers and acquisitions are definitely an industry trend relevant to this case because of the frequency of occurrence. Consolidation increases concentration in an industry by allowing the top few firms a competitive advantage which would not be attained previously. The U.S. food and fiber system is the nations largest Manufacturing sub sector according to the percentage of Gross Domestic Product and typically accounts for 12% of entire employment. The U.S. food industry historically is intensely competitive with relatively slow growth and modest margins.

New products are extremely important to the industry. General Foods and its competitors were continually seeking more and better ways to diversify their product lines by introducing new products. Companies can achieve this by either by utilizing existing technology and resources or by developing entirely new technologies. In order for firms to expand their market share, successful competitors appear to be relying on one of these two competitive approaches:

1. Large scale, diverse operations with reliable quality and highly competitive prices. (For example, consolidations are an effective way to broaden a firms product line and build market share in a mature domestic market)

OR

2. Highly effective control of costs, including minimizing inventory and labor costs

III. Analysis of Alternative Solutions

General Foods has a fairly rigid corporate plan set for the analysis of potential capital projects. They have established different procedures for analyzing capital projects based on their purpose (such as safety and convenience, quality and increased profit). The purpose of the Super project puts it into the category of "Projects designed to provide facilities to manufacture and distribute a new product or product line." The Payback and ROFE Criteria for a project in this