Summary
Depending on a company’s specific situation, different methods for evaluating project returns are appropriate. If we were evaluating a choice of (A, B, C, D) and there is unlimited investment resources, then the answer is to simply pick out all of the positive NPV projects. However, if there are limited resources, then the right answer is to optimize based on cashflows. The current situation is similar. General Foods needs to develop a method of evaluating projects that takes into consideration the potential limitation of resources, now and in the future, and generate the highest ROE for equity investors. Neither the incremental analysis nor the fully allocated analysis presented in the case is quite the optimal method. An alternative method that combines the attractive elements of both would give us a more optimal solution, and would probably satisfy the proponents of both.
Company Discussion
General Foods has been steady growing over the last ten years. The average sales growth is 5.7%. Average net income growth is 8.4%. The average sales growth is 8.4%. Everything considered, General Foods is a well run, conservatively financed, and cash rich company.
Return on equity has held steady for the last ten years between 16% and 17%. Return on sales has improved during the same period, rising from 4.8% to 6.0%, perhaps on the basis of the innovative product offerings. However, the return on sales had not translated to higher ROE because it is dragged down by lower asset turnover. This is perhaps due to higher capital investments, or less efficient use of existing assets. Leverage ratio has barely changed over the ten year period.
The powdered dese ...