Part 1: Financial Analysis
a. Which NPV of those shown in Exhibit 5 should be used? Why?
NPV at Corp Weighted-Average cost of capital (WACC) at 10.5% should be used.
WACC is the actual cost of capital for Queensland Corp. It takes all form of capitals into consideration, including debt, equity, or preferred capital, and represents the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere. On the other hand, minimum Rate of Return (ROR) only indicates the minimum return can be earned by the corporation.
WACC is more comprehensive than RoR, which doesn’t take cost of capital into consideration. Importantly, WACC is dictated by the external market and not by management. With limited budget, Queensland Food Corp should consider cost in an objective way. Therefore, NPV at WACC should be used
b. Using all NPV forms presented in Exhibit 5, rank the projects.
Ranking with NPV at Corp WACC
Ranking Project ID Project Name NPV at Corp WACC
1 11 Bundaberg Rum Acquisition 4.79
2 7 Market Expansion (Western Territory) 1.199
3 8 Market Expansion South (Victoria) 0.9
4 9 Snack Food Development/ Introduction 0.895
5 4 Yogurt/ Ice Cream Development/ Introduction 0.521
6 10 Computer-based Inventory Control System 0.116
7 2 New Plant Construction 0.099
8 3 Existing Plant Expansion 0.028
9 5 Plant Automation -0.087
10 1 Distribution Truck Fleet Replacement/ Expansion -0.192
Ranking with NPV at Min ROR
Ranking Project ID Project Name NPV at Min RoR
1 11 Bundaberg Rum Acquisition 4.143
2 7 Market Expansion (Western Territory) 0.99
3 9 Snack Food Development/ Introduction 0.731
4 4 Yogurt/ Ice Cream Development/ Introduction 0.388
5 2 New Plant Construction 0.187
6 10 Computer-based Inventory Control System 0.178
7 8 Market Expansion South (Victoria) 0.071
8 3 Existing Plant Expansion 0.055
9 5 Plant Automation 0.032
10 1 Distribution Truck Fleet Replacement/ Expansion -0.013
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.
As stated in the case study, Water treatment project is considered as an environmental category. In most cases, environmental projects that involve the government (in this case the Australian Gov.) would require a longer time in terms of return on investment. From a basic Financial Analysis, the cost of Wastewater project today is only $400,00 with a potential increase up to $1 million in 4 years. Given this minimum amount of initial cost and opportunity to have a big impact on the environmental benefits by getting rid of the pesticides and chemicals, company can make this project as a potential investment to pursue. In addition to this approach, we can evaluate with other measures such as 1) the efficiency rate that the company would gain by the amount saved each year or 2) Environmental Score Index model that focuses on the importance value and benefit of the environmental project as I stated above.
d. List the projects that would be funded or unfunded using the financial analysis (include Project 6 in your list)
Projects that would be funded: Project 11, 7 and 8 - (Bundaberg Rum Acquisition, Market Expansion and Market Expansion South). First, Bundaberg Rum Acquisition would bring a high expected return, and offers an opportunity for an expansion in a unique market. Market Expansion West and South – West having an increasing high purchasing power and South having an increased demand within a large population would make these two as a potential investment. All three projects have high IRR compared to NVP at Corp WAAC (10.5%). Given the fact that the board of directors are willing to spend max of $8 million; Project 11,7 and 8 would add up to total of $8 million in initial cost and would make an ideal investment plan ($4m, $2m and $2m respectively).
Projects that would not be funded are 4, 10, 2, 9, 3, 5, 1 and 6.
Part 2
a. Use a scoring model to evaluate and select projects (pp. 45-47, Kloppenborg):
i. List and define potential criteria
• Time: Total hours/days the project is going to take, the duration of the project is significant, longer length of time could also cause higher cost of money.
• New product: New products could bring extra attention from the market, which could potentially increase the final sales and future market expansion.
• Cost: Directly effects the weighted score model analysis, a significant criterion which people usually consider first.
• Physical Environment: climate changes and natural disasters could change the process of the project and also the demand of the market.
• Resource Planning: For new product development, people are new to this, it may need extra resources on some of the projects. And for some other projects, they may need less resources. So, reasonable resource planning is critical.
• Congeneric product: before people make the decision of choosing projects, people should think about if they have any other congeneric product in the market or in projection. If they do have, thinking whether this product will effect their old product’s market share. Start a projection of a congeneric or similar product may generate more risks.
• Success probability: The possibility of a successful project development.
• Payback period: the length of time the project would take to pay back or recover the initial investment cost. Shorter pay-back periods are more considerable.
• Government Regulations: Make sure there will be no conflicts between the project development and government rules. Project should comply the existing rules and also be caution of the upcoming potential government regulations.
• Continuity: A good continuity of the project should include great strategy planning and subsequent repair and maintenance. A good continuity could increase the life of the whole production and projection.
ii. List and define those criteria that are mandatory (i.e., screening) criteria
• New product: As the corporation would like to have more net profit, new products have higher chance to boost the market demand, so it is a mandatory criterion.
• Cost: In this case this corporation have a spending limit, and the cost of each project is fixed. Therefore, it is mandatory.
• Payback period: The company set up a policy for project approval, it brings out the minimum acceptable IRR and Maximum Acceptable Payback years. Hence, it is mandatory.
• Success Probability: IRR, potential profit, future development could all effect the success probability. With this comprehensive term, the high probability means the better chance of success. So, it is mandatory.
• Time: the length of the projection could directly change the current and future cash flow. With the ceiling of spending, time becomes a mandatory criterion.
iii. Weight the remaining criteria using an AHP process:
Physical Environment Resource Planning Congeneric Product Government Regulations Continuity Total Votes PercentagePhysical Environment N/A 1 1 2 1 5 12.5%
Resource Planning 3 N/A
2 3 2 10 25%
Congeneric Product 3 2 N/A
3 1 9 22.5%
Government Regulations 2 1 1 N/A
0 4 10%
Continuity 3 2 3 4 N/A
12 30%
b. Which projects were screened from further consideration in part 2a, ii?
c. Rank order the remaining projects based on the group analysis.
The remaining projects are ranked as below: