These questions are from : Energy gel, a new product introduction case. Can be found online $($ Kellogg case study$)$

Energy Gel: Case Questions

The most important financial decision a firm makes is selecting the correct projects. Projects

whose expected return exceeds their cost of capital $($i$.$e$.$ projects with a positive net present value$)$

create wealth for the firm's shareholders. One of the most, if not the most important, component of

valuation is the correct estimation of future cash flows. We will use this case to discuss how to forecast

future cash flows. The case examines investment in a new product line inside a multi$-$divisional firm.

This raises the question of which cash flows are relevant to the decision and how to allocate costs

correctly. We will discuss both the science and art of forecasting cash flows and valuing projects using

the discounted cash flow method. The following questions should guide your thinking as you read the

case and provide the basis of our classroom discussion.

Cash flow forecasting. ${?}^1$ Which cash flows are relevant for HPC$\text{'}$s decision of whether to

launch the Energy Gel product line? In addition to the standard cash flows, you should consider

how to treat the product development expenses, the allocation of overhead costs, the possible

cannibalization of Energy Bar sales by Energy Gel, and the required investment in

manufacturing capacity $($mixing machines$)$ required to produce Energy Gel. Many, but not all,

of the numbers you need are in Exhibit $5.$ Construct your cash flow forecasts based on these

numbers, but also consider whether you think the numbers are correct. Use $15\%$ as your

required cost of capital.

Value of the Energy Gel Project. Should HPC pursue the Energy Gel market? To answer this

question, you need to consider how a firm should make investment decisions. HPC uses several

metrics when choosing which investment projects to pursue. Based on what you have learned

in class. Which evaluation approach should HPC consider when making this decision?

Theory versus practice. Valuation is often taught as a very scientific process. Given the cash

flows and the discount rate, all parties should agree on whether the project is a good one. In

practice, the cash flow forecasts may be produced as part of a political process. What are the

key factors to be aware of in this project that may drive the management team to reach a

different conclusion?

Write a paper, no longer than $4$ pages $($double spaced with font no smaller than $11).$ Please use the

following format when writing your paper:

A$)$ Should HPC move forward or not with the project? What evaluation approach should

HPC use in making the decision?

B$)$ What are the key forecasting assumptions that led your conclusion? Which numbers

were relevant to your calculations, and which were not?

C$)$ What political and subjective factors could persuade management to make a different

decision than your recommendation? What assumptions are impacted and how do they

affect the outcome of the analysis?

D$)$ Please prepare a financial model $("$DCF$")$ supporting your recommendation and

include it as an exhibit. All relevant assumptions in your model must be explained in

your paper.