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 Exce" Spreadsheet on #$ %ebsite&'he #anage#ent ana"$sis in Exhibit 6 does not deduct depreciation fro# the pro(ect)s taxab"e inco#e& I have done that in Modified-Exhibit 6& - In Exhibit 6! the first change in *et +or,ing -apita" occurs in period .& I have ,ept that assu#ption in Modified-Exhibit 6& It is o, to #ove a"" changes in *+- bac, one period! if $ou prefer to do so& - 'he depreciation ca"cu"ation uses an o"d for#u"a that is no "onger used in practice& I have exp"ained the for#u"a and derived depreciation and boo, va"ues in Modified-Exhibit 6& Suppose $ou are responsib"e for #a,ing the fina" decision about the Super Pro(ect! on March ./60! and $ou have read a"" the data and the ana"$sis in 1'he Super Pro(ect2& Shou"d $ou go ahead %ith the pro(ect or not3 I %i"" he"p $ou out b$ as,ing a fe% specific 4uestions! the t$pe of 4uestions $ou %ou"d have to as, $ourse"f in a rea" %or"d situations& Specific questions .5 6re the cash f"o%s in Exhibit 6 or Modified-Exhibit 6 correct3 *otice that the reason for inc"uding the cash f"o%s in Exhibit 6 is exp"ained in detai" in the 1'he Super Pro(ect2& In particu"ar! shou"d 7enera" 8oods inc"ude the fo""o%ing or not3 9iscuss brief"$& a5 'est #ar,et expenses: b5 -harges for the use of Je""-; agg"o#erator capacit$: c5 -harges for erosion of Je""-; sa"es: d5 ;verhead expenses: Tip: Read Crosby Sandbergs analysis in Appendix A carefully, and also the reply in Appendix B. And remember the discussions e had in class about incremental cash flo s. 25 <ased on $our discussion in .5 %hat are the expected! incre#enta"! after-tax cash f"o%s for the Super Pro(ect3 =se a tax rate of >2?& 6ssu#e the sa"vage va"ue of the pro(ect is e4ua" to the boo, va"ue of assets! and that *+- is fu""$ recovered at the end of the p"anning hori@on A.0 $ears in this case5& Tip: !f you need to estimate another cash flo that is not in "odified#$xhibit%&, use Crosbys analysis. 'r do something else you thin( is reasonable. There may not be a )right* ans er in this case. But your analysis must be internally consistent. And ! ha+e to see ho you got to the specific cash flo .

35 +hat are the *PB and ICC of the pro(ect! if the discount rate is .0?3 Shou"d $ou a"so use Pa$bac, and 66C to eva"uate this pro(ect! as the #anage#ent does3 9iscuss brief"$& D5 Eo% sensitive are these nu#bers Ain 4uestion 35 to the decisions $ou #ade in 4uestion .3 +hich decisions are particu"ar"$ i#portant3 *otice this re4uires $ou to figure out cash f"o%s that are not in Modified-Exhibit 6! and do so#e sensitivit$ ana"$sis! even if $ou thin, Modified-Exhibit 6 is exact"$ correct& >5 Eo% attractive is the Super Pro(ect in strategic and co#petitive ter#s3 +hat potentia" ris,s and benefits does 78 incur b$ either accepting or re(ecting the pro(ect3 I haven)t to"d $ou $et %hat the Super Pro(ect is! but it is possib"e to have a good idea about this b$ reading the introduction to the case AP"ease be brief here! but this is a crucia" step of an$ financia" ana"$sis5& Tip: Thin( about ,- competitors, and the state of the .essert "ar(et in /0&& 1table A2. This should also help you in 3uestion 1/2. 65 *o% %e are read$ to #a,e a fina" decision& <ased on a"" the discussion above! shou"d $ou go ahead %ith the pro(ect or not3 9iscuss brief"$&