Spring 2003 Professor Kose John
The Super Project Case – Questions and Hints
I have digested the data in Exhibit 6 to produce Modified-Exhibit#6, in the Excel Spreadsheet on my website.The management analysis in Exhibit 6 does not deduct depreciation from the project’s taxable income. I have done that in Modified-Exhibit#6.
- In Exhibit 6, the first change in Net Working Capital occurs in period 1. I have kept that assumption in Modified-Exhibit#6. It is ok to move all changes in NWC back one period, if you prefer to do so.
- The depreciation calculation uses an old formula that is no longer used in practice. I have explained the formula and derived depreciation and book values in Modified-Exhibit#6.
Suppose you are responsible for making the final decision about the Super Project, on March 1967, and you have read all the data and the ...view middle of the document...
And remember the discussions we had in class about incremental cash flows.
2) Based on your discussion in 1) what are the expected, incremental, after-tax cash flows for the Super Project? Use a tax rate of 52%. Assume the salvage value of the project is equal to the book value of assets, and that NWC is fully recovered at the end of the planning horizon (10 years in this case).
Tip: If you need to estimate another cash flow that is not in Modified-Exhibit#6, use Crosby’s analysis. Or do something else you think is reasonable. There may not be a “right” answer in this case. But your analysis must be internally consistent. And I have to see how you got to the specific cash flow.
3) What are the NPV and IRR of the project, if the discount rate is 10%? Should you also use Payback and AAR to evaluate this project, as the management does? Discuss briefly.
4) How sensitive are these numbers (in question 3) to the decisions you made in question 1? Which decisions are particularly important? Notice this requires you to figure out cash flows that are not in Modified-Exhibit#6, and do some sensitivity analysis, even if you think Modified-Exhibit#6 is exactly correct.
5) How attractive is the Super Project in strategic and competitive terms? What potential risks and benefits does GF incur by either accepting or rejecting the project? I haven’t told you yet what the Super Project is, but it is possible to have a good idea about this by reading the introduction to the case (Please be brief here, but this is a crucial step of any financial analysis).
Tip: Think about GF competitors, and the state of the Dessert Market in 1966 (table A). This should also help you in question (1).
6) Now we are ready to make a final decision. Based on all the discussion above, should you go ahead with the project or not? Discuss briefly.