INCA COLA

Quick Overview

In 1966-67, General Foods Corporation was considering introducing a new product called

Super, “a new instant dessert based on a flavored, water-soluble, agglomerated

powder,” to U.S. and foreign markets. The proposed capital investment for the project

was $200,000, and its production would take place in an existing building in which Jell-O

was manufactured using the available capacity of a pre-existing Jell-O agglomerator.

Once introduced into the market, Super was expected to capture a 10% market share,

8% of which would come from growth in the dessert market and 2% of which would

come from the erosion of Jell-O sales.

In evaluating whether Super would be a good investment or not, the problem of

evaluating projects based on only incremental cash flows was brought up. Crosby

Sanberg, a manager of financial analysis at General Foods presented three different

ways of evaluating the return on Super. The first was an incremental basis that was

regularly used by General Foods in evaluating projects. It projected that Super would

have an attractive return of 63%. The second was a facilities-used basis, which took into

account the opportunity cost of using available, pre-existing Jell-O equipment. This

method projected that Super would have a return of 34%. The last approach was a fully

allocated basis that included the opportunity cost and overhead costs. This method

projected that Super would have a return of 25%, just barley meeting the minimum

required return of 24% for a project of it's risk. The dilemma for General Foods was to

decide what the best method for evaluating the Super project was since each method

produced drastically different returns.

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