8/2/2019 Section B 7 Super Project

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Ashish Mittal (2011071), Gaurav Dani (2011078), Piyush Sharoff (2011097), Prateek Jha (2011100),

Pronit Kakati (2011101), Sanmeet Walia (2011107)

The Super Project

1. After going through the case, suggest as to what percentage of the test marketexpenses should be included as a cost for the super project?

Answer. Test market expenses should not be included as a cost for the Super Project as it is aSUNK COST, and has already been incurred as part of research, irrespective of the decisionof the company to go forth with the project or not.

2. The current CAPEX process is ignoring the cost of the building and excessagglomerator capacity. Sandberg is proposing something different. Given the facts inthe case and/or additional assumptions, who do you agree with? If you think bothmethods are flawed can you propose a better alternative?

Answer. We do not fully agree with Sandbergs proposition.According to us, the opportunity cost of the building and the agglomerator should be takeninto account in addition to the overhead cost arising out of increased project activity after a

period of 5 years (as per alternative 3)

3. Similarly, Sandberg disagrees with the current treatment of overhead costs. Given thefacts in the case, what is your opinion?

Answer. We agree with Sandberg that the current treatment of overhead costs is not correct.Therefore, we would suggest inclusion of overhead cost arising out of increased projectactivity after a period of 5 years (as per alternative 3)

4. The company is charging the Super project with the erosion caused to the Jell-Oprofits. As a finance analyst, identify the conditions under which this would be thecorrect approach. Similarly identify conditions under which erosion can be ignored.

Given the facts in the case what is the correct thing to do?Answer. Under the condition that the sales of Jell-O decreases as a direct consequence ofundertaking the Super Project, the erosion cost should e charged to Super project.In this case, we can confirm that 20% of Super profits would come from erosion of Jell-O.So, this is correct thing to do in this case.

5. Given your recommendations above please advise the management whether theyshould undertake The super Project.

Answer. As per our calculations keeping into mind the above considerations, The SuperProject should be undertaken.

NPV 42.93

IRR 11.18

The super project.xls