This study is written by Knowles. This study is written for undertaking reappraisal squad of Laurentian Bakeries Inc. This study undertakings a new enlargement scheme for the Winnipeg works to run into the demand of the new trade. Founded in 1984 Laurentian Bakeries Inc. operates in the industry of fabricating a huge assortment of frozen adust merchandises within their three runing workss in Montreal. Winnipeg and Toronto. The operating workss produce points such as frozen pizza in Winnipeg. Manitoba. pies in Montreal. Quebec and Cakes in Toronto. Ontario – with each stand foring 30 % . 30 % and 40 % of the entire gross watercourse severally. The purchasers for this company include big institutional clients such domino’s pizza. etc. which have a significantly higher degree of power whereas the marketer of the merchandises consists of several nutrient manufacturers which have a comparatively low degree of power.
With the cost of puting up a works of this graduated table being high. replacement merchandises will besides stay high in the market doing the overall net income border to be low. With the company’s ongoing attempt for uninterrupted betterment Danielle Knowles ( VP of operations ) proposed to spread out one of the operating workss in Winnipeg – which was based on the chance if the company expanded into the U. S. market. We have analyzed the undertaking in footings of NPV based on the expected gross revenues and cost figures. The NPV computation is done to find if set abouting the undertaking would convey net income or loss to the house.
Assorted scenarios were taken to project the NPV at those instances. This study besides covers the Quantitative hazards associated with exchange rate as Laurentian will be exporting to US food market concatenation and will gain in dollars. The tools to extenuate those hazards are besides mentioned. We have identified hazards related to discrepancy in units sold. Any lessening in figure of units sold can impact the profitableness of undertaking. We have devised tools to extenuate those hazards besides. We have besides analyzed the non-quantitative hazards associated and extenuation hazards are besides considered.
Net Present Value
Net Present Value ( NPV ) is the difference between the present value of hard currency influxs and the present value of hard currency escapes. It is used in capital budgeting to analyse the profitableness of an investing or undertaking. In instance of Laurentian Bakeries Inc. the NPV for a peculiar enlargement undertaking needed to be calculated. For the base-case scenario. best-case scenario and the worst-case scenario all hard currency influxs and escapes have been considered. The present value of all the capital costs incurred ( including depreciation ) such as land. enlargement of edifice. extra warehouse infinite. coiling deep-freeze and pizza processing line have been computed. We have taken certain premises for the computation of the Net Present Value. Premises
Inflation Adjustment: Inflation affects all the factors of production and gross. Therefore all the factors will alter in a similar manner. Thus we neglect this as they will call off each other out.
Expansion of staff $ 223. 000 for enlargement of staff will non be considered as a portion of this computation since these employees would hold been hired even if this undertaking were non undertaken. This is a sunk cost.
Capacity of the works and goods sold In 2009. the capacity of the new works is 5. 3 million units and the figure of units sold is 5. 3 million every bit good.
No extra fixed costs were incurred in 2005.
15 % runing border cost includes all costs incurred.
Savingss of $ 138. 000 per twelvemonth due to new installation is reduced from fixed cost
All the workss of Laurentian bakeshops have equal net income border and cost of goods sold is distributed as per ratio.
At the terminal of 4 old ages. the goods to be sold at UCC.
Current Capacity of the works is 10. 9 million and the enlargement of the works by 60 % will increase the capacity by 6. 54 million
No farther land is required which makes the current use of land = 10. 9/ ( 10. 9+6. 54 ) = 62. 5 % . After the enlargement. the land available for usage will increase by 37. 5 %
Land monetary values in Winnipeg addition by 1. 5 % per twelvemonth. The land monetary value at terminal of 4th twelvemonth is $ 99542.
Other nest eggs besides vary from 70 % to 130 % and hence accommodations are made to repair cost.
Laurentian has dealing exposure since it has hard currency flows in US dollars whose value is capable to unforeseen alterations in the exchange rate. Thus the Laurentian Bakery faces a hazard of alterations in exchange rate between the foreign and domestic currencies. Economic Exposure Laurentian besides has economic exposure to the grade to which the market value is influenced by unexpected exchange rate exposure fluctuations. This can impact the firm’s market portion place and its value. Overall grosss for Laurentian will depend to a great extent on CAD to USD ratio. If this rate additions. grosss obtained from US food market ironss will be deserving less in CAD. Thus any addition in the ratio decreases the value of house. The hazard profile can be drawn as below Laurentian demands to extenuate these foreign exchange rate hazard and it can make so by utilizing any of the below tools. 1. Foreign Exchange Forward Contract
Here the Laurentian can purchase future contracts to countervail the currency exchange hazard ; the bakeshop should come in into a Foreign Exchange Forward Contract to hold on a fit monetary value of the plus today to be paid for at some hereafter day of the month. These are lawfully adhering and can be tailored to run into both party demands. Presently there was a autumn in ratio of CAD to US but there are positive marks and the ratio has shown positive marks towards betterment. This addition needs to be mitigated and it can make so by purchasing a forward for a certain exchange rate at a certain clip in future. Î” Exchange Rate CAD to USD
It can be observed that by purchasing a forward on a certain exchange monetary value. we can fudge the house against rise in CAD to USD ratio. The issue with this scheme is that. if CAD gets weaker with regard to USD. we won’t be able to gain benefit from it. 2. Future Contract Futures are a signifier of forwards with the difference that the additions and losingss are realized each twenty-four hours alternatively of merely the colony day of the month. Future contracts are traded on organized security exchange. and necessitate an upfront payment called “margin” . Future contracts are recognition hazard free. compared to the forward contracts. since the clearinghouse guarantees the public presentation of these Future contracts. Here the Laurentian can choose for currency hereafters of the USD. The scheme should be same as that of forwards and the ensuing profile will besides be same as Forwards. 3. Foreign currency Options
Options give the Laurentian the right but non the duty to purchase ( sell ) an plus for a fit monetary value on or before a fixed day of the month. This is one of the best derived functions because it gives the opportunity to fudge the loss of the bakeshop due to interchange rate fluctuation while at the same clip it assures that the bakeshop can take part in the upside potency. Options are of two types i. e. Call Option and Put option. Laurentian bakeshop needs to extenuate the lessening in value of company due to increase in value of CAD w. r. T to USD. Buying a Call option can make this. As shown in the figure below. if there is addition in value of CAD w. r. T to USD. Laurentian can exert the call and purchase CAD at a certain fixed lower than current exchange rate. This will assist me extenuate the hazard. If the value of CAD falls in comparing to USD. we can still gain net income but a little factor due to monetary value associated with will cut down the net incomes buy monetary value of Call. Î” Exchange Rate CAD to USD
The hazard profile is shown below:
4. Topographic point Contract Laurentian can besides fudge the foreign currency exchange hazard by purchasing a topographic point contract. These contracts fix exchange rates against fluctuations. Laurentian might non be able to profit from positive swings. but a negative swing won’t hurt it. The downside to these contracts is that Laurentian will hold to pay for them. therefore it will efficaciously be guaranteed to lose a small money. Other suggestions for the Laurentian: Besides it is suggested to diversify the hazard across different currencies since different currencies move otherwise. therefore the loss due to one currency could be mitigated with addition in another currency. Even if we enter into forwards contracts with the food market shops in the US to sell our goods at set monetary values in the close hereafter. we would still run into important exchange rate hazard.
To fudge against the short-run exchange rate hazard. we choose to see the scenario wherein the exchange rate of Canadian dollar to US dollar additions. If the exchange rate additions. Laurentian bakeshop as Sellerss would confront a loss in value since the USD would be deserving less when converted to CAD. If the exchange rate lessenings Thus in a place like this. the best option to extenuate the losingss by exchange rate hazard. would be to purchase currency call options which would countervail the losingss if the exchange rate rises. Exerting call on CAD would increase in value if exchange rates rise. Commodity Futures Trading
Hedging against Unit of measurements Sold
The enlargement scheme is based on outlook of a four-year sole understanding with one of the US food market ironss. It creates an chance of selling a sum of 16. 8 million is four old ages. There is a 50 % chance that the existent demand will be half of this sum. As per our computation. we show that in this instance. we have a negative NPV and in this scenario taking up the undertaking will take to loss to the house. The hazard profile for alteration in measure with alteration in value is as below.
We can extenuate the hazard by selling a hereafter contract. which will do the purchaser purchase certain units from us a certain monetary value. The exercising monetary value might be lesser than the existent market monetary value but it will assist us extenuate most of the hazard due to low demand of Frozen pizza from the food market concatenation. We can make a forward. which will do the purchaser purchase the measures expected which is the difference between the guaranteed sum by the food market Chain and expected measure from the understanding. The exercising of per unit can be set at $ 1. 7 as per the present monetary value. The final payment profile for the above hazard is shown below.
These factors are those that can non be reflected by quantitative methods. These are really of import for the undertaking and if non paid attending to might take to failure of the undertaking. Directors need to pay attending to these non-quantitative factors and must seek to extenuate these hazards by different agencies. Negative Factors: Change in Management at Laurentian: An organisation broad alterations might ensue in emphasis related issues of the employees. The undermentioned grounds could be responsible for the emphasis related issues. perceived unfairness or unfairness. deficiency of timely communicating of future alterations. and loss of trueness. This might besides take to lower employee morale and loss of productiveness might be really harmful to the company.
Stricter environmental ordinances by authorities: The Company must take attention of all the environmental concerns related to the undertaking and besides take attention of any new ordinances that the authorities is expected to go through in the coming old ages. Thus the company must take attention to guarantee that any bi-product or wastewater is decently treated and disposed so that they do non do any negative consequence to the environment. Thus is really important for the advancement of our undertaking. Stricter nutrient safety ordinances by FDA: Food safety has become a really of import concern non merely for the people who consume it but besides to the company itself. The authorities besides regulates it to a great extent. therefore the company needs to pay particular attending in order to run into all the ordinances. If these are neglected the undertaking might acquire delayed or even be cancelled Other Factors: Strategic factor: The directors must do certain that the new undertaking is aligned to the firm’s short term and long term scheme and that there is uninterrupted betterment in the new undertaking so that it adds some value to the house every bit good.
This is one of the most of import factors since if non addressed decently it might take to the rejection of the undertaking straightaway. Cold supply concatenation in the industry: Supply concatenation is really of import for the company and determines the success and failure of the undertaking. The company needs to work with all the supply concatenation spouses specially the cold storage warehouses and the transit spouses. The directors must find if the current spouses can make the work or is it required to subscribe new spouses particularly for this undertaking. Besides the promotion in engineering in this field is traveling on at a really fast gait and might led to diminish in clip and besides possibly cost of the supply concatenation rhythm. We can besides utilize Porter’s Five Competitive Forces model to depict some non-quantitative factors. 1 ) Menace of new Entrant: The new undertaking would do Laurentian a low cost green goods and would assist it keep or even turn its market portion.
This will do it difficult for any new entrants to take a pie of Laurentian’s market portion. 2 ) Dickering power of the Buyer: Laurentian will hold to countervail the purchasing power of the USA based food market concatenation in order to keep the net income borders. The company must do certain that it is non forced to sell at a lower net income border. 3 ) Menace of replacements: A displacement in the penchant of the people to Burgers and other nutrients might ache the pizza industry and Laurentian severely. The directors must make their due diligence before traveling for the long-run investing of this undertaking. 4 ) Competition from the bing rivals: McCain nutrient is the leader of the and therefore this undertaking becomes even more imperative to Laurentian. by this they will be able to capture a new market in the USA and therefore increase their portion of the market. Furthermore by economic systems of graduated table of productions they will be able to acquire larger net incomes by keeping same net income borders. 5 ) Dickering power of provider: Though the monetary values of the implicit in merchandises required to do pizza bases have kept changeless over the old ages. but in the aftermath of a sudden alteration in the monetary values the providers might acquire upper manus and demand a larger net income.
The Laurentian bakeshop direction realized that the Winnipeg plant’s largest beginning of lost chance was the deficit of capacity. The new capacity proposed provides the following benefits – reduced cost of fabrication. addition in gross revenues from 10. 9 million to 16. 54 million in 4 old ages. and therefore increased net incomes. From the informations provided by Knowles. the Net Present Value of the hard currency flows for the given base instance is positive. The pessimistic instance ( worst instance ) which has a negative NPV. This hazard of the undertaking weakness can be mitigated by selling hereafter on trade good to the US based food market which ensures that Laurentian does non imply a contractual loss. A scenario hazard profile indicates that. for the base instance Laurentian can gain a positive Net Income throughout the four old ages. A farther survey of break-even analysis shows that Laurentian will hold to sell a lower limit of 3. 07 million units to accomplish fiscal interruption even and sell 8. 74 million units to accomplish hard currency interruption even and Laurentian can accomplish these Numberss within the 2 old ages and 4 old ages severally. Sing the premises Laurentian bakeshop will do a net income all three old ages.