Chiffon Case Essay

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Albert Roebianto Fina 404 04/02/2012 Prof. Copeland Chiffon Project I.Problem In the Chiffon Project, General Foods experiences a difficulty in deciding whether a Chiffon project has a good or bad risk reward profile for the company. General Foods through Mr. Peters, as an analyst, considers three methods to evaluate the Chiffon project: 1. Incremental basis. 2. Facilities-used basis. and 3. Fully allocated facilities and cost basis. However, before we breakdown and analyze these three methods, we need to understand the criteria General Foods uses to evaluate a project. Chiffon project is designed to increase a company bottom line. And since the Chiffon project itself is a project designed to provide facilities to manufacture and distribute a new product or line; then, the minimum criteria (hurdle rate) for this project is ten year average ROFE must be greater or equal than 40%. General Foods currently employs an incremental basis method to analyze its projects. Under incremental basis, the capital spending for this project is $20 million, and it can yield ROFE around 63%. This high ROFE exceeds the hurdle rate that the company establishes to accept a project. As a result, from an incremental valuation, the company should accept this project. However, this method has deficiency, because according to Mr. Peters, the assumption for capital spending of this project ($20 million) is inappropriate, since the Chiffon project will use Jell-O buildings and facilities extensively. Then, the allocation of agglomerator and building should be also included in Chiffon project. Therefore, the company should not use the incremental method to value the Chiffon project since Mr. Peters argues that it has the wrong assumption. Mr. Peters’ argument toward incremental method leads the company to consider the second way to calculate Chiffon project, facilities-used basis.

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