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PMGT – 510
CASE REPORT
QUEENSLAND FOOD CORPORATION
TEAM MBO’ers
KRUNAL SHAH
DANCHEN XU
ZEEL PATEL
HERISHKUMAR PATEL
KAUSTUBH PAWAR
1
TABLE OF CONTENTS
Company Overview
Problem Identification
Resource Allocation
Exhibits
References
2
Company Overview
Queensland Food Corp
Headquarter: Brisbane, Australia
Products: High Quality ice cream, yogurt, bottled water and fruit juices
Marketing Regions: States: Queensland, New South Wales,
Territories: ACT, Northern Territory
Problem Identification
To allocate funds among range of projects up for nomination
11 Projects up for consideration totaling over $20.8 million
Spending Limit: $8 million
Firm’s asset base: $65.6 million
Resource Allocation
Capital Budget
Project Proposals Financial Tests
Committee
Project description Payback Period
5 Managing Directors
3
Case Study Questions
1. Financial Analysis:
Both NPV at WACC and at minimum ROR could be used. While WACC is the actual cost of capital
to the company and is essential to make IRR calculations, NPV at minimum ROR gives a better
understanding of the risk return profile of each project. In general, a project whose IRR is greater
than equal to firm’s cost should be accepted and whose IRR is less than firm’s cost of capital
should be rejected.
The project with highest positive NPV should be given the highest priority over other projects.
In all the NPV forms, project with highest positive NPV has receive highest rank (Rank I)
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Market Expansion West
7 0.990 Rank II
(Western Territory)
8 Market Expansion South (Victoria) 0.710 Rank IV
Snack Food
9 0.731 Rank III
Development/Introduction
Computer-based Inventory Control
10 0.178 Rank VII
System
11 Bundaberg Rum Acquisition 4.143 Rank I
Project Equivalent
Project Name Rank
ID Annuity
Distribution Truck Fleet
1 -0.002 Rank IX
Replacement/Expansion
2 New Plant Construction 0.030 Rank VI
3 Existing Plant Expansion 0.009 Rank VII
Fat Free(!) Greek Yogurt/Ice
4 0.069 Rank V
Cream Development/Introduction
Plant Automation and Conveyor
5 0.006 Rank VIII
System
Market Expansion West
7 0.175 Rank II
(Western Territory)
8 Market Expansion South (Victoria) 0.125 Rank IV
Snack Food
9 0.129 Rank III
Development/Introduction
Computer-based Inventory Control
10 0.069 Rank V
System
11 Bundaberg Rum Acquisition 0.733 Rank I
c. Since the wastewater treatment project is a cost of doing business, it does not have a
NPV. Suggest a way to evaluate the effluent project.
Although the waste water treatment plan does not have a NPV, it should be considered as
one of the most critical projects as it directly affects the company’s market image and
compliance with the legal regulations. Tightened regulations from Australian government and
risks of getting the pollution record public, thus tarnishing the company’s image makes this
project inevitable to undertake. Some projects cannot be evaluated on the grounds of financial
tests and requires qualitative selection criteria’s. In this case, the company could undertake
this project under its guiding principles such as corporate social responsibility mission
realizing its responsibility towards the community and environment. By promoting its
environmentally friendly processes, the company can set itself apart from its competitors and
attract new customers increasing its brand value, sales and market share.
5
d. List the projects that would be funded or unfunded using the financial analysis
(include Project 6 in your list)
Project approval is based on two financial tests – payback and internal rate of return (IRR).
Do Not
Pass
Project Payback Test IRR Test Pass
Project Name both
ID Status Status both
Tests
Tests
Distribution Truck Fleet
1 Fail Fail X
Replacement/Expansion
2 New Plant Construction Fail Pass X
3 Existing Plant Expansion Fail Pass X
Fat Free(!) Greek Yogurt/Ice
4 Cream Fail Pass X
Development/Introduction
Plant Automation and
5 Fail Pass X
Conveyor System
Market Expansion West
7 Pass Pass X
(Western Territory)
Market Expansion South
8 Pass Pass X
(Victoria)
Snack Food
9 Pass Pass X
Development/Introduction
Computer-based Inventory
10 Pass Pass X
Control System
11 Bundaberg Rum Acquisition Pass Pass X
Of all the projects that pass both tests, the projects would be selected per the project rankings.
However, if Project 6 –Waste water Treatment is selected based in the environmental category, Project
9 would be replaced by Project 6.
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2. Weighted Scoring Model Analysis
Based on the paper by Englund and Graham (1999), Chapter 2 (Kloppenborg (2017)) and the case
information,
a. Use a scoring model to evaluate and select projects (pp. 45-47, Kloppenborg):
Strategic positioning: reposition that will promote the ongoing agenda and will advance
the greater goods for the company overall
Probability of success: project aligns with the company's overall goal and will bring
monetary returns
Market size: project is tailored to the size of the market
Availability of staff: project will utilize company's employee capacity
Customer satisfaction: improve service levels, results in more consistent and accurate
transactions, helps ensure services are delivered as promised and expected
Employee satisfaction: improve employee's knowledge, efficiency, and effectiveness
with balanced workload
Business Value: align with business goals, minimize potential risks, achieves results that
are critical to a specific business opportunity
Process Effectiveness: streamline the use of technology to ensure the services are
delivered in a timely fashion with high quality, improve employee's efficiency, reduce non-
value-added activities
ii. List and define those criteria that are mandatory (i.e., screening) criteria
Process Effectiveness: streamline the use of technology to ensure the services are
delivered in a timely fashion with high quality, improve employee's efficiency, reduce non-
value-added activities
Market size: project is tailored to the size of the market
Probability of success: project aligns with the company's overall goal and will bring
monetary returns
Business Value: align with business goals, minimize potential risks, achieves results that
are critical to a specific business opportunity
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iii. Weight the remaining criteria using an AHP process
b. Which projects were screened from further consideration in part 2a, ii?
Following projects cannot qualify to pass the screening criteria test. Company should omit them
out from nominated project list.
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product in same category. By going with Alcohol product, company is exploring whole new
category which can be risky.
Water Treatment:
Currently Queensland Food corp. drain dirty water into the rivers, this can raise the question
of environment, and water pollution by the Australian government in the future. This can affect
the company's image in the eye of consumers.
Plant Automation:
The new proposed plant automation of production line will improve the speed and reduce the
accident, spillage and production tie-ups. This project will help to improve the operation
efficiency.
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The screened projects are assessed based on the defined mandatory criteria. Below is the table
for the weighted score model analysis where less the number value is less effective of the project
in defined mandatory criteria.
Based on the weighted scoring model analysis model, project for distribution truck feet
replacement/expansion is selected.
3. Were the results different between the financial analysis (Question 1) and the weighted
scoring model (Question 2) approach? If yes, why?
The results were certainly different between the financial analysis and the weighted scoring model. The
reason is that the projects are evaluated using different sets of selection criterion. While the financial
analysis focusses on a project’s monetary returns in future, the scoring model approach focusses on
project alignment with the company’s business objectives
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Exhibits
Exhibit 2 Summary of Financial Results (millions AUD except per share amounts)
Project Cost
Project Description Project Type
ID (Millions)
Distribution Truck Fleet
1 2.2 Efficiency (or Expansion)
Replacement/Expansion
2 New Plant Construction 3.0 Market Extension
3 Existing Plant Expansion 1.0 Market Extension
Fat Free(!) Greek Yogurt/Ice Cream
4 1.5 New Product
Development/Introduction
5 Plant Automation and Conveyor System 1.4 Efficiency
Environmental
6 Wastewater Treatment (4 plants) 0.4
Compliance
7 Market Expansion West (Western Territory) 2.0 New Market
8 Market Expansion South (Victoria) 2.0 New Market
9 Snack Food Development/Introduction 1.8 New Product
10 Computer-based Inventory Control System 1.5 Efficiency
11 Bundaberg Rum Acquisition 4.0 New Product
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Exhibit 5 Free Cash Flow and Analysis of Proposed Projects (Note 1) ($ millions AUD)
Project 1. 2. 3. 4. 5. 7. 8 9 10 11
Distribution New Plant Existing Yogurt/ Ice Plant Market Market Snack Food Computer- Bundaberg
Truck Fleet Construction Plant Cream Automation Expansion Expansion Development/ based Rum
Replacement/ Expansion Development/ (Western South Introduction Inventory Acquisition
Expansion Introduction Territory) (Victoria) Control (Note 5)
System
(Note 3)
Investment
Property 2.0 2.5 1 1.5 1.4 0 0 1.5 1.5 3.0
Working Capital 0.20 0.50 0 0 0 2.0 2.0 0.30 0 1.0
Year Expected Free Cash Flow (Note 4)
0 -1.14 -3.0 -1.0 -0.50 -1.4 -2.0 -2.0 -1.8 -1.2 -1.5
1 -0.79 0.20 0.125 -0.50 0.275 0.35 0.3 0.3 0.55 -2.0
2 0.30 0.50 0.150 -0.50 0.275 0.4 0.35 0.4 0.55 0.50
3 0.35 0.55 0.175 0.3 0.275 0.45 0.4 0.45 0.50 0.90
4 0.40 0.60 0.20 0.3 0.275 0.5 0.45 0.50 1.1
5 0.45 0.63 0.225 0.4 0.275 0.55 0.5 0.50 1.3
6 0.50 0.65 0.25 0.45 0.275 0.6 0.55 0.50 1.5
7 0.70 0.675 0.15 0.5 0.275 0.65 0.6 0.50 1.7
8 0.50 0.15 0.55 0.7 0.65 0.50 1.9
9 0.53 0.15 0.6 0.75 0.7 0.50 2.1
10 0.55 0.15 0.65 0.8 0.75 0.50 5.9
Undiscounted 0.77 2.375 0.725 2.25 0.525 3.75 3.25 2.85 0.4 13.4
Sum
Payback (Years) 6 6 6 7 6 5 6 5 3 5
Max Payback 4 6 5 5 4 6 6 6 4 6
Accepted
IRR 7.8% 11.3% 11.2% 17.3% 8.7% 21.4% 18.8% 20.5% 16.2% 28.7%
Min Accepted 8.0% 10.0% 10.0% 12.0% 8.0% 12.0% 12.0% 12.0% 8.0% 12.0%
ROR
NPV at Corp -0.192 0.099 0.028 0.521 -0.087 1.199 0.900 0.895 0.116 4.79
WAAC (10.5%)
NPV at Min ROR -0.013 0.187 0.055 0.388 0.032 0.990 0.071 0.731 0.178 4.143
Equivalent -0.002 0.030 0.009 0.069 0.006 0.175 0.125 0.129 0.069 0.733
Annuity (Note 2)
2Equivalent Annuity is that level of equal payments over 10 years that yields a NPV at the minimum required rate of
return for that project. It corrects for differences in duration among various projects. In ranking projects based on EA, larger
annuities create more investor wealth than smaller annuities.
4Free cash flow = incremental profit or cost savings after taxes + depreciation – investment in fixed assets
5$1.5 million would be spent in year one, $2.0 million in year two, and 0.5 million in year 3.
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References
Retrieved from
https://xplaind.com/595242/discount-rate
https://www.investopedia.com/terms/w/wacc.asp
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