财务管理案例分析英文版doc 10页.docx

财务管理案例分析英文版doc 10页.docx

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财务管理案例分析英文版doc10页

财务管理案例分析-英文版（doc10页）

LAURENTIANBAKERIES

Thedecision-makermustmakearecommendationonalargeexpansionproject.Discountedcashflowanalysisisrequired.

InlateMay,1995,DanielleKnowles,vice-presidentofoperationsforLaurentianBakeriesInc.,waspreparingacapitalexpenditureproposaltoexpandthecompany’sfrozenpizzaplantinWinnipegManitoba.IftheopportunitytoexpandintotheU.S.frozenpizzamarketwastaken,thecompanywouldneedextracapacity.Adetailedanalysis,includinganetpresentvaluecalculation,wasrequiredbythecompany’sCapitalAllocationPolicyforallcapitalexpendituresinordertoensurethatprojectswerebothprofitableandconsistentwithcorporatestrategies.

COMPANYBACKGROUHD

Establishedin1984,LaurentianBakeriesInc.（Laurentian）manufacturedavarietyoffrozenbakedfoodproductsatplantsinWinnipeg（pizzas）,Toronto（cakes）andMontreal（pies）.Whileeachplantoperatedasaprofitcenter,theysharedacommonsalesforcelocatedatthecompany’headofficeinMontreal.AlthoughtheTorontoplantwasresponsibleforover40%ofcorporaterevenuesinfiscal1994,andtheotherplantswasaccountedforabout30%each,allthreedivisionscontributedequallytoprofits.Thecompanyenjoyedstrongcompetitivepositionsinallthreemarketsanditwasthelowcostproducerinthepizzamarket.IncomeStatementsandBalanceSheetsforthe1993to1995fiscalyearsareinExhibits1and2,respectively.

Laurentiansoldmostofitsproductstolargegrocerychains,andinfact,supplyingseveralCanadianchainswithprivatelabelbrandpizzasgeneratedmuchofthesalesgrowth.Othersalesweremadetoinstitutionalfoodservices.

Thecompany’ssuccesswas,inpart,theproductofitsmanagement’sphilosophies.ThecornerstoneofLaurentian’soperationswasitsincludingacommitmenttoabusinessstrategypromotingcontinuousimprovement;forexampleallemployeeswereempoweredtothinkaboutandmakesuggestionsforwaysofreducingwaste.AsDanielleKnowlessawit:

“ContinuousimprovementisawayoflifeatLauremtian.”Also,thecompanywasknownforitsabove–averageconsiderationforthehumanresourceandenvironmentalimpactofitsbusinessdecisions.Thesephilosophiesdroveallpolicy-making,includingthosepoliciesgoverningcapitalallocation.

DanielleKnowles

DanielleKnowles’scareer,whichspanned13yearsinthefoodindustry,hadincludedpositionsinotherfunctionalareassuchasmarketingandfinance.ShehadreceivedanundergraduatedegreeinmechanicalengineeringfromQueen’sUniversityinKingston,Ontario,andamasterofbusinessadministrationfromtheWesternBusinessSchool.

THEPIZZAINDUSTRY

Majorsegmentsinthepizzamarketwerefrozenpizza,deli-freshchilledpizza,restaurantpizzaandtake-outpizza.Ofthesefour,restaurantandtake-outwerethelargest.Whilethesesegmentsconsistedofthousandsofsmall-ownedestablishments,afewlargeNorthAmericanchains,whichincludedDomino’s,PizzaHutandLittleCaesar’s,dominated.

ApprovalofacapitalexpenditureproposalwascontingentonthreerequirementswhichareillustratedinExhibit4.Thefirstoftheserequirementswastheoperatingdivision’sdemonstratedcommitmenttocontinuousimprovement（C.I.）,thecriteriaofwhicharedescribedinExhibit5.Thesecondrequirementwasthatallprojectsofmorethan$300,000beincludedintheStrategicPlan.Thefinalrequirementwasthatforprojectsgreaterthan$1million,theoperatingdivisionhadtoachieveitsprofittarget.However,ifaprojectfailedtomeetanyoftheserequirements,therewasamechanismthroughwhichemergencyfundsmightbeallocatedsubjecttothecorporateexecutivecommittee’sreviewandapproval.Iftheprojectwaslessthan$1millionanditmetallthreerequirements,onlydivisionalreviewandapprovalwasnecessary.Otherwise,approvalwasneededfromtheexecutivecommittee.

TheproposedWinnipegplantprojectwasconsideredaclass2projectastheexpendituresweremeanttoincreasecapacityforexistingproductsortoestablishafacilityfornewproducts.Capitalprojectscouldfallintooneofthreeotherclasses:

costreduction（Class1）;equipmentorfacilityreplacement（Class3）;orothernecessaryexpendituresforR&D,productimprovements,qualitycontrolandconcurrencewithlegal,government,health,safetyorinsurancerequirementsincludingpollutioncontrol（Class4）.Aprojectspendingauditwasrequiredforallexpenditures;however,asavingsauditwasalsoneedediftheprojectwasconsideredeither1or2.Eachclassofprojecthadadifferenthurdleratereflectingdifferentlevelsofrisk.Class1projectswereconsideredthemostriskyandhadahurdlerateof20%.Class2andClass3projectshadhurdleratesof18%and15%,respectively.

KnowleswasresponsiblefordevelopingtheWinnipegdivision’sCapitalPlanandcompletingallAFEforms.

WINNIPEGPLANT’SEXPANSIONOPTIONS

LaurentianhadmanufacturedfrozenpizzasattheTorontoplantuntil1992.However,afterthecompanybecamethesolesupplierofprivate-labelfrozenpizzasforalargegrocerychainandwasforcedtosecureadditionalcapacity,itacquiredtheWinnipegfrozenpizzaplantfromacompetitor.Aprogramofregularmaintenanceandequipmentreplacementmadethenewplantthelowcostproducerintheindustry,withanoperatingmarginthataveraged15%.

Theplan,withitsprovencommitmenttocontinuousimprovement,hadsuccessfullymetitsprofitobjectiveforthepastthreeyears.Aftertheshortageofcapacityhadbeenidentifiedastheplant’slargestsourceoflostopportunity,managementwaseagertorectifythisproblemastargetedforintheStrategicPlan.BecausethefacilityhadalsoincludedtheproposedplantexpansioninitsStrategicPlan,itmetallthreerequirementsforconsiderationofapprovalforacapitalproject.

Annualsaleshadmatchedplantcapacityof10.9millionfrozenpizzaswhenLauentianconcludedthatopportunitiessimilartothoseinCanadaexistedintheU.S.AnopportunitysurfacedwherebyLaurentiancouldhaveanexclusivearrangementtosupplyalargeU.S.-basedgrocerychainwithitsprivate-label-brandfrozenpizzasbeginninginApril,1996.Asaresultofthisarrangement,frozenpizzasaleswouldincreaserapidly,adding2.2millionunitsinfiscal1996,another1.8millionunitsinfiscal1997,andthen1.3millionadditionalunitstoreachatotalof5.3millionadditionalunitsbyfiscal1998.However,thetermsoftheagreementwouldonlyprovideLaurentianwithguaranteedsalesofhalfthisamount.Knowlesexpectedthattherewasa50%chancethatthegrocerychainwouldorderonlytheguaranteedamount.Laurentiansoldfrozenpizzastoitscustomersfor$1.7in1995andpriceswereexpectedtoincreasejustenoughtokeeppacewithinflation.Productioncostswereexpectedtoincreaseatasimilarrate.

Laurentianhadconsidered,butrejected,threeotheralternativestoincreaseitsfrozenpizzacapacity.First,theacquisitionofacompetitor’sfacilityinCanadahadbeenrejectedbecausetheequipmentwouldnotsatisfytheimmediatecapacityneedsnorachievethecostreductionpossiblewithexpansionoftheWinnipegplant.Second,theacquisitionofacompetitorintheU.S.hadbeenrejectedbecausetheavailableplantwouldrequireacapitalinfusiondoublethatrequiredinWinnipeg.Aswell,therewererisksthattheproductqualitywouldbeinferior.Last,theexpansionoftheTorontocakeplanthadbeenrejectedasitwouldrequireacapitaloutlaysimilartothatinthesecondalternative.TheonlyremainingalternativewastheexpansionoftheWinnipegplant.BykeepingthefrozenpizzainWinnipeg,Laurentiancouldbetterexploiteconomiesofscaleandassureconsistentlyhighproductquality.

TheProposal

Theexpansionproposal,whichwouldrequiresixmonthstocomplete,wouldrecommendfourmainexpenditures:

expandingtheexistingbuildinginWinnipegby60%wouldcost$1.3million;addingaspiralfreezer,$1.6million;installinganewhighspeedpizzaprocessingline,$1.3million;andacquiringadditionalwarehousespace,$600,000.Including$400,000forcontingencyneeds,thetotalcashoutlayfortheprojectwouldbe$5.2million.Theequipmentwasexpectedtobeusefulfor10years,atwhichpointitssalvagevaluewouldbezero.

ThelandonwhichtheWinnipegplantwasbuiltvaluedat250,000andnoadditionallandwouldbenecessaryfortheproject.WhiletheexpansionwouldnotrequireLaurentiantoincreasethesizeoftheplant’sadministrativestaff,Knowleswonderedwhatportion,ifany,ofthe$223,000infixedsalariesshouldbeincludedwhenevaluatingtheproject.Likewise,sheestimatedthatitcostLaurentianapproximately$40,000insalesstafftimeandexpansestosecuretheU.S.contractthathadcreatedtheneedforextracapacity.Last,networkingcapitalneedswouldincreasewithadditionalsales.Workingcapitalwasthesumofinventoryandaccountsreceivablelessaccountspayable,allofwhichwereafunctionofsales.Knowlesestimated,however,thatthenewhigh-speedlinewouldallowthecompanytocuttwodaysfromaverageinventoryage.

Addedtothebenefitderivedfromincreasedsales,theprojectwouldreduceproductioncostsintwoways.First,thenewhigh-speedlinewouldreduceplant-wideunitcostby$0.009,thoughonly70%ofthisincreasedefficiencywouldberealizedinthefirstyear.Therewasanequalchance,however,thatonly50%ofthesesavingscouldactuallybeachieved.Second,“other”savingstotaling$138,000peryearwouldalsoresultfromthenewlineandwouldincreaseeachyearattherateofinflation.

Eachyear,acapitalcostallowance（CCA）,akintodepreciation,wouldbedeductedfromoperatingincome