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1、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 the companys
2、 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 expenditur
3、es 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 (pies). Whi
4、le 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 divisions contrib
5、uted 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 products to la
6、rge 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 Laurentians o
7、perations 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.” Also, the co
8、mpany 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 in the foo
9、d 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 INDUSTRYMajor
10、 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 included Domino
11、s, 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 frozen produ
12、cts 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 U.S. Feder
13、al 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 rates, in pa
14、rt 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 based on the co
15、mpanys 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 return on in
16、vestment. 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 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
