财务管理案例分析英文版.docx

1、财务管理案例分析英文版LAURENTIAN BAKERIESThe decision-maker must make a recommendation on a large expansion project. Discounted cash flow analysis is required.In late May, 1995, Danielle Knowles, vice-president of operations for Laurentian Bakeries Inc., was preparing a capital expenditure proposal to expand t

2、he companys frozen pizza plant in Winnipeg Manitoba. If the opportunity to expand into the U.S. frozen pizza market was taken, the company would need extra capacity. A detailed analysis, including a net present value calculation, was required by the companys Capital Allocation Policy for all capital

3、 expenditures in order to ensure that projects were both profitable and consistent with corporate strategies.COMPANY BACKGROUHDEstablished in 1984, Laurentian Bakeries Inc. (Laurentian) manufactured a variety of frozen baked food products at plants in Winnipeg (pizzas), Toronto (cakes) and Montreal

4、(pies). While each plant operated as a profit center, they shared a common sales force located at the company head office in Montreal. Although the Toronto plant was responsible for over 40% of corporate revenues in fiscal 1994, and the other plants was accounted for about 30% each, all three divisi

5、ons contributed equally to profits. The company enjoyed strong competitive positions in all three markets and it was the low cost producer in the pizza market. Income Statements and Balance Sheets for the 1993 to 1995 fiscal years are in Exhibits 1 and 2, respectively.Laurentian sold most of its pro

6、ducts to large grocery chains, and in fact, supplying several Canadian chains with private label brand pizzas generated much of the sales growth. Other sales were made to institutional food services.The companys success was, in part, the product of its managements philosophies. The cornerstone of La

7、urentians operations was its including a commitment to a business strategy promoting continuous improvement; for example all employees were empowered to think about and make suggestions for ways of reducing waste. As Danielle Knowles saw it: “Continuous improvement is a way of life at Lauremtian.” A

8、lso, the company was known for its above average consideration for the human resource and environmental impact of its business decisions. These philosophies drove all policy-making, including those policies governing capital allocation.Danielle KnowlesDanielle Knowless career, which spanned 13 years

9、 in the food industry, had included positions in other functional areas such as marketing and finance. She had received an undergraduate degree in mechanical engineering from Queens University in Kingston, Ontario, and a master of business administration from the Western Business School.THE PIZZA IN

10、DUSTRYMajor segments in the pizza market were frozen pizza, deli-fresh chilled pizza, restaurant pizza and take-out pizza. Of these four, restaurant and take-out were the largest. While these segments consisted of thousands of small-owned establishments, a few large North American chains, which incl

11、uded Dominos, Pizza Hut and Little Caesars, dominated.Although 12 firms manufactured frozen pizzas in Canada, the five largest firms, including Laurentian, accounted for 95% of production. McCain Foods was the market leader with 44% market share, while Laurentian had 21%. Per capita consumption of f

12、rozen products in Canada was one-third of the level in U.S. where retail prices were lower.ECONOMIC CONDITIONSThe North American economy had enjoyed strong growth since 1993, after having suffered a severe recession for the two previous years. Interest rates bottomed-out in mid-1994, after which the

13、 U.S. Federal Reserve slowly increased rates until early 1995 in an attempt to fight inflationary pressures. Nevertheless, North American inflation was expected to average 3% to 5%annually for the foreseeable future. The Bank of Canada followed the U.S. Federal Reserves lead and increased interest r

14、ates, in part to protect the Canadian dollars value relative to the value of the U.S. dollar. The result was a North American growth rate of gross domestic product that was showing signs of slowing down.LAURRENTIANS PROJECT REVIEW PROCESSAll capital projects at Laurentian were subject to review base

15、d on the companys Capital Allocation Policy. The latest policy, which had been developed in 1989 when the company began considering factors other than simply the calculated net present value for project evaluation, was strictly enforced and managers evaluated each year partially by their divisions r

16、eturn on investment. The purpose of the policy was to reinforce the management philosophies by achieving certain objectives: that all projects be consistent with business strategies, support continuous improvement, consider the human resource and environmental impact, and provide a sufficient return

17、 on investment.Prior to the approval of any capital allocation, each operating division was required to develop both a Strategic and an Operating Plan. The Strategic Plan had to identify and quantify either inefficiencies or lost opportunities and establish targets for their elimination, include a t

18、hree-year plan of capital requirements, link capital spending to business strategies and continuous improvement effort, and achieve the company-wide hurdle rates.The first year of the Strategic Plan became the Annual Operating Plan. This was supported by a detailed list of proposed capital projects

19、which became the basis for capital allocation. In addition to meeting all Strategic Plan criteria, the Operating Plan had to identify major continuous improvement initiatives and budget for the associated benefits, as well as develop a training plan identifying specific training objectives for the y

20、ear.These criteria were used by head office to keep the behavior of divisional managers consistent with corporate objectives. For example, the requirement to develop a training plan as part of the operational plan forced managers to be efficient with employee training and to keep continuous improvem

21、ent as the ultimate objective.All proposed projects were submitted on an Authorization for Expenditure (AFE) Form for review and approval (see Exhibit 3). The AFE had to present the projects linkage to the business strategies. In addition, it had to include specific details of economics and engineer

22、ing, involvement and empowerment, human resource, and the environment. This requirement ensured that projects had been carefully thought through by forcing managers to list the items purchased, the employees involved in the project, the employees adversely affected by the project, and the effect of

23、the project on the environment.Approval of a capital expenditure proposal was contingent on three requirements which are illustrated in Exhibit 4. The first of these requirements was the operating divisions demonstrated commitment to continuous improvement (C.I.), the criteria of which are described

24、 in Exhibit 5. The second requirement was that all projects of more than $300,000 be included in the Strategic Plan. The final requirement was that for projects greater than $1 million, the operating division had to achieve its profit target. However, if a project failed to meet any of these require

25、ments, there was a mechanism through which emergency funds might be allocated subject to the corporate executive committees review and approval. If the project was less than $1 million and it met all three requirements, only divisional review and approval was necessary. Otherwise, approval was neede

26、d from the executive committee.The proposed Winnipeg plant project was considered a class 2 project as the expenditures were meant to increase capacity for existing products or to establish a facility for new products. Capital projects could fall into one of three other classes: cost reduction (Clas

27、s 1); equipment or facility replacement (Class 3); or other necessary expenditures for R&D, product improvements, quality control and concurrence with legal, government, health, safety or insurance requirements including pollution control (Class 4). A project spending audit was required for all expe

28、nditures; however, a savings audit was also needed if the project was considered either 1 or 2. Each class of project had a different hurdle rate reflecting different levels of risk. Class 1 projects were considered the most risky and had a hurdle rate of 20%. Class 2 and Class 3 projects had hurdle

29、 rates of 18% and 15%, respectively.Knowles was responsible for developing the Winnipeg divisions Capital Plan and completing all AFE forms.WINNIPEG PLANTS EXPANSION OPTIONSLaurentian had manufactured frozen pizzas at the Toronto plant until 1992. However, after the company became the sole supplier

30、of private-label frozen pizzas for a large grocery chain and was forced to secure additional capacity, it acquired the Winnipeg frozen pizza plant from a competitor. A program of regular maintenance and equipment replacement made the new plant the low cost producer in the industry, with an operating

31、 margin that averaged 15%.The plan, with its proven commitment to continuous improvement, had successfully met its profit objective for the past three years. After the shortage of capacity had been identified as the plants largest source of lost opportunity, management was eager to rectify this prob

32、lem as targeted for in the Strategic Plan. Because the facility had also included the proposed plant expansion in its Strategic Plan, it met all three requirements for consideration of approval for a capital project.Annual sales had matched plant capacity of 10.9 million frozen pizzas when Lauentian

33、 concluded that opportunities similar to those in Canada existed in the U.S. An opportunity surfaced whereby Laurentian could have an exclusive arrangement to supply a large U.S.-based grocery chain with its private-label-brand frozen pizzas beginning in April, 1996. As a result of this arrangement, frozen pizza sales wou