Sanberg also advocates that Super should be charged with the "opportunity loss" of agglomerating capacity and building space that could be used for future production of Jell-O or other products. .
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Management also analyzed the project based on the amount of facilities-used. Recognizing that Super will use half of an exisiting agglomerator and two thirds of an existing building, Sanberg added Super's pro rata shares of these facilities to the incremental capital. Overhead costs directly related to these existing facilities were also subtracted from incremental revenue on a shared basis. Sanberg felt this analysis was a useful was of putting various projects on a common ground for purposes of relative evaluation. .
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Lastly, management included a fully allocated basis of the project in their projections. They recognized that individual decisions to expand inevitably add to a higher overhead base and therefore an increase to the costs and investment base were added. Overhead expenses included manufacturing costs plus selling and general and administrative costs on a per unit basis equivalent to Jell-O. Overhead capital also included a share of the distribution system assets. .
Analysis.
Upon review of management's case, we broke down the relevant cash flows separately according to test-market expenses, overhead expenses, erosion of Jell-O contribution margin and allocation of charges for the use of excess agglomerator capacity. The four capital budgeting techniques appropriate for review are NPV, IRR, ARR and payback period. .
The accounting for test-market expense yielded the following results:.
Exhibit 1.
Net Present Value.
$671.98.
Internal Rate of Return.
24.73%.
Average Rate of Return.
216.34%.
Payback Period.
5.04 years.
The accounting for overhead expense yielded the following results:.
Exhibit 2.
Net Present Value.
$704.30.
Internal Rate of Return.
28.83%.
Average Rate of Return.
207.70%.
Payback Period.
4.55 years.
The accounting for erosion of Jell-O sales yielded the following results:.