Unit 2 Group Assignment Group Assignment (suggested level of effort by each group member: 4 hours) Now that your team is assembled, a mini-case is presented below with several questions.  Read the case and prepare responses to the questions. CASE: Queensland Food Corp In early January 2003, the senior-management committee of Queensland Food Corp was to meet to draw up the firm’s capital budget for the new year. Up for consideration were 11 major projects that totaled over $20.8 million. Unfortunately, the board of directors had imposed a spending limit of only $8.0 million; even so, investment at that rate would represent a major increase in the firm’s asset base of $65.6 million. Thus the challenge for the senior managers of Queensland Food Corp was to allocate funds among a range of compelling projects nominated for consideration.  The Company Queensland Food Corp, headquartered in Brisbane, Australia, was a producer of high-quality ice cream, yogurt, bottled water, and fruit juices. Its products were sold throughout two states (Queensland, New South Wales) and two territories (ACT and Northern Territory).  (See Exhibit 1 for map of the company’s marketing region.) Exhibition 1 (See Attached) Exhibition 2 (See Attached) Most members of management wanted to expand the company’s market presence and introduce more new products to boost sales. Resource Allocation The capital budget at Queensland Food Corp was prepared annually by a committee of senior managers who then presented it for approval by the board of directors. The committee consisted of five managing directors, the president Chief Executive (CEO), and the chief finance officer (CFO). Typically, the CEO solicited investment proposals from the managing directors. The proposals included a brief project description, a financial analysis, and a discussion of strategic or other qualitative consideration. As a matter of company policy, investment proposals at Queensland Food Corp were subjected to two financial tests, payback and internal rate of return (IRR). Financial tests were considered hurdles and had been established in 2001 by the management committee and varied according to the type of project: Exhibition 3 (See Attached) In January 2003, the estimated weighted-average cost of capital (WACC) for Queensland Food Corp was 10.5 percent. In describing the capital-budgeting process, the CFO, Tony Austin, said, “We use the sliding scale of IRR tests as a way of recognizing differences in risk among the various types of projects. Where the company takes more risk, we should earn more return. The payback test signals that we are not prepared to wait for long to achieve that return.” At the conclusion of the most recent meeting of the directors, the board voted unanimously to limit capital spending in 2003 to $8.0 million. Exhibition 4 (See Attached) 1.    Distribution Truck Fleet Replacement/Expansion . Wayne Ramsey proposed to purchase 100 new refrigerated tractor ...

1. Unit 2 Group Assignment
Group Assignment (suggested level of effort by each group
member: 4 hours)
Now that your team is assembled, a mini-case is presented
below with several questions. Read the case and prepare
responses to the questions.
CASE: Queensland Food Corp
In early January 2003, the senior-management committee of
Queensland Food Corp was to meet to draw up the firm’s capital
budget for the new year. Up for consideration were 11 major
projects that totaled over $20.8 million. Unfortunately, the
board of directors had imposed a spending limit of only $8.0
million; even so, investment at that rate would represent a major
increase in the firm’s asset base of $65.6 million. Thus the
challenge for the senior managers of Queensland Food Corp was
to allocate funds among a range of compelling projects
nominated for consideration.
The Company
Queensland Food Corp, headquartered in Brisbane, Australia,
was a producer of high-quality ice cream, yogurt, bottled water,
and fruit juices. Its products were sold throughout two states
(Queensland, New South Wales) and two territories (ACT and
Northern Territory). (See Exhibit 1 for map of the company’s
marketing region.)
Exhibition 1 (See Attached)

2. Exhibition 2 (See Attached)
Most members of management wanted to expand the company’s
market presence and introduce more new products to boost
sales.
Resource Allocation
The capital budget at Queensland Food Corp was prepared
annually by a committee of senior managers who then presented
it for approval by the board of directors. The committee
consisted of five managing directors, the president Chief
Executive (CEO), and the chief finance officer (CFO).
Typically, the CEO solicited investment proposals from the
managing directors. The proposals included a brief project
description, a financial analysis, and a discussion of strategic or
other qualitative consideration.
As a matter of company policy, investment proposals at
Queensland Food Corp were subjected to two financial tests,
payback and internal rate of return (IRR). Financial tests were
considered hurdles and had been established in 2001 by the
management committee and varied according to the type of
project:
Exhibition 3 (See Attached)
In January 2003, the estimated weighted-average cost of capital
(WACC) for Queensland Food Corp was 10.5 percent. In
describing the capital-budgeting process, the CFO, Tony Austin,
said, “We use the sliding scale of IRR tests as a way of
recognizing differences in risk among the various types of
projects. Where the company takes more risk, we should earn

3. more return. The payback test signals that we are not prepared
to wait for long to achieve that return.”
At the conclusion of the most recent meeting of the directors,
the board voted unanimously to limit capital spending in 2003
to $8.0 million.
Exhibition 4 (See Attached)
1.
Distribution Truck Fleet Replacement/Expansion
. Wayne Ramsey proposed to purchase 100 new refrigerated
tractor trailer trucks, 50 each in 2003 and 2004. By doing so,
the company could sell 60 old, fully depreciated trucks over the
two years for a total of $120,000. The purchase would expand
the fleet by 40 trucks within two years. Each of the new trailers
would be larger than the old trailers and afford a 15 percent
increase in cubic meters of goods hauled on each trip. The new
tractors would also be more fuel and maintenance efficient. The
increase in number of tucks would permit more flexible
scheduling and more efficient routing and servicing of the fleet
than at present and would cut delivery times and, therefore,
possibly inventories. It would also allow more frequent
deliveries to the company’s major markets, which would reduce
loss of sales cause by stock-outs. Finally, expanding the fleet
would support geographical expansion over the long term. As
shown in Exhibit 3, the total net investment in trucks of $2.2
million and the increase in working capital to support added
maintenance, fuel, pay-roll, and inventories of $200,000 was
expected to yield total cost savings and added sales potential of
$770,000 over the next seven years. The resulting IRR was
estimated to be 7.8 percent, marginally below the minimum 8
percent required return on efficiency projects. Some of the
managers wondered if this project would be more properly

4. classified as “efficiency” than “expansion.”
2.
New Plant Construction
. Ian Gardner noted that Queensland Food Corp’s yogurt and
ice-cream sales in the southeastern region of the company’s
market were about to exceed the capacity of its Sydney
manufacturing and packaging plant. At present, some of the
demand was being met by shipments from the company’s newest
most efficient facility, located in Darwin, Australia. Shipping
costs over that distance were high however, and some sales
were undoubtedly being lost when marketing effort could not be
supported by delivery. Gardner proposed that a new
manufacturing and packaging plant be built in ACT, Australia,
just at the current southern edge of Queensland Food Corp’s
marketing region, to take the burden off the Sydney and Darwin
plants.
The cost of this plant would be $2.5 million and would entail
$500,000 for working capital. The $1.4 million worth of
equipment would be amortized over seven years, and the plant
over ten years. Through an increase in sales and depreciation,
and decrease in delivery costs, the plant was expected to yield
after-tax cash flows totaling $2.4 million and an IRR of 11.3
percent over the next ten years. This project would be classified
as a market extension.
3.
Existing Plant Expansion
. In addition to the need for greater production capacity in
Queensland Food Corp’s southeastern region, its Cairns’ plant
had reached full capacity. This situation made the scheduling of
routine equipment maintenance difficult, which, in turn, created
production-scheduling and deadline problems. This plant was
one of two highly automated facilities that produced Queensland
Food Corp’s entire line of bottled water, mineral water, and

5. fruit juices. The Cairn’s plant supplied Northern Territory and
Queensland (the major market).
The Cairn’s plants capacity could be expanded by 20 percent for
$1.0 million. The equipment ($700,000) would be deprecated
over seven years, and the plant over ten years. The increased
capacity was expected to result in additional production of up to
$150,000 per year, yielding an IRR of 11.2 percent. This project
would be classified as a market extension.
4.
Fat Free(!) Greek Yogurt/Ice Cream Development/Introduction
. David D. Jones noted that recent developments in the
European market showing promise of significant cost savings to
food producers as well as stimulating growing demand for low-
calorie products. The challenge was to create the right flavor to
complement or enhance the other ingredients. For ice-cream
manufacturers, the difficulty lay in creating a balance that
would result in the same flavor as was obtained when using
traditional yogurt/ice cream.
$1.5 million would be needed to commercialize a yogurt line
that had received promising results in consumer and production
tests. This cost included acquiring specialized production
facilities, working capital, and the cost of the initial product
introduction. The overall IRR was estimated to be 17.3 percent.
Jones stressed that the proposal, although highly uncertain in
terms of actual results, could be viewed as a means of
protecting present market share, because other high-quality ice-
cream producers carrying out the same research might introduce
these products; if the HooRoo Cakes brand did not carry a fat
free line and its competitors did, the HooRoo Cakes brand might
suffer. This project would be classed in the new-product
category of investments.

6. 5.
Plant Automation
. Ian Gardner also requested $1.4 million to increase automation
of the production lines at six of the company’s older plants. The
result would be improved throughout speed and reduced
accidents, spillage, and production tie-ups. The last two plants
the company had built included conveyer systems that
eliminated the need for any heavy lifting by employees. The
systems reduced the chance of injury to employees; at the six
older plants, the company had sustained on average of 75
missed worker-days per year per plant in the last two years
because of muscle injuries sustained in heavy lifting. At an
average hourly wage of $14.00 per hour, over $150,000 per year
was thus lost, and the possibility always existed of more serious
injuries and lawsuits. Overall cost savings and depreciation
totaling $275,000 per year for the project were expected to yield
an IRR of 8.7 percent. This project would be classed in the
efficiency category.
6.
Water Treatment (4 plants)
. Queensland Food Corp preprocessed a variety of fresh fruits at
its Brisbane and Darwin plants. One of the first stages of
processing involved cleaning the fruit to remove dirt and
pesticides. The dirty water was simply sent down the drain and
into the like-named rivers. Recent legislation from the
Department of Sustainability, Environment, Water, Population
and Communities (Australian Government) called for any waste
water containing even the slight traces of poisonous chemicals
to be treated at the sources and gave companies four years to
comply. As and environmentally oriented project, this proposal
fell outside the normal financial tests of project attractiveness.
Gardner noted, however, that the wastewater treatment
equipment could be purchased today for $400,000; he
speculated that the same equipment would cost $1.0 million in
four years when immediate conversion became mandatory. In

7. the intervening time, the company would run the risks that
Australian Government and local regulators would shorten the
compliance time or that the company’s pollution record would
become public and impair the image of the company in the eyes
of the consumer. This project would be classed in the
environmental category.
7.
Market Expansion West (Western Territory) and 8. Market
Expansion South (Victoria)
. Mick Dell’Orco recommend that the company expand its
market westward to include the Western Territory and to the
south (Victoria, South Australia and Tasmania). He believed it
was time to expand sales of ice cream, and possibly yogurt,
geographically. It was his theory that the company could
sustain expansions in both directions simultaneously, but
practically speaking, Dell’Orco doubted that the sales and
distribution organizations could sustain both expansions at
once.
Each alternative geographical expansion had its benefits and
risks. If the company expanded southward, it could reach a
large population with a great appetite for frozen dairy products,
but it would also face more competition from local and state ice
cream manufacturers. The southward expansion would have to
be supplied by facilities in ACT and New South Wales, at least
initially.
Looking to the west, consumers in Western Territory have
substantial purchasing power due to the explosion in the mining
industry, but the population is significantly less than in the
southward expansion geographical area. Expansion to the west
would require building consumer demand and planning for
future plants to produce products in Western Territory.
Expansion to the west would need to be supplied by rail from
Darwin facilities and further redistribution truck fleet.

8. The initial cost for each proposal was $2 million in working
capital. The bulk of the costs were expected to involve the
financing of distributorships, but over the ten-year forecast
period, the distributors would gradually take over the burden of
carrying receivables and inventory. Both expansion proposals
assumed the rental of suitable warehouse and distribution
facilities. The after-tax cash flow was expected to be $3.75
million for southward expansion and $2.75 million for westward
expansion. Dell’Orco pointed out that southward expansion
meant a higher possible IRR but that moving westward was a
less risky proposition. The projected IRRs were 21.4 percent
and 18.8 percent for southward and westward expansion,
respectively. These projects would be classed in the new
market category.
9.
Snack Food Development/Introduction
. David D. Jones suggested that the company use the excess
capacity in its Darwin facility to produce a line of snack foods
of dried fruits to be test-marketed in Northern Territory. He
noted the strength of the HooRoo brand in that area and the
success of other food and beverage companies that had
expanded into snack food production. He also argued that the
company’s reputation for wholesome, quality products would be
enhanced by a line of dried fruits and that name association
with the new product would probably even lead to increased
sales of the company’s other products among health-conscious
consumers.
Equipment and working capital invests were expected to total
$1.5million and $300,000, respectively, for this project. The
equipment would be depreciated over seven years. Assuming
the test market was successful, cash flows from the project
would be able to support further plant expansions in other
strategic locations. The IRR was expected to be 20.5 percent,

9. well above the IRR required for new product projects (12
percent).
10.
Computer-based Inventory Control System
. Wayne Ramsey had pressed for three years unsuccessfully for
a state-of-the-art computer-based inventory-control system that
would link field sales reps, distributors, drivers, warehouses,
and possibly retailers. The benefits of such a system would be
shortening delays in ordering and order processing, better
control of inventory, reduction of spoilage, and faster
recognition of changes in demand at the customer level.
Ramsey was reluctant to quantify these benefits, because they
could range between modest and quite large amounts. This year
he presented a cash-flow forecast as part of a business case for
the project. An initial outlay of $1.2 million for the system,
followed by $300,000 next year for ancillary equipment. The
inflows reflected depreciation tax shields, tax credits, cost
reductions in warehousing, and reduced inventory. He
forecasted these benefits to last for only three years. Even so,
the project’s IRR was estimated to be 16.2 percent. This project
would be classed in the efficiency category.
11.
Bundaberg Rum Acquisition
. Anthony Mitchel had advocated making diversifying
acquisitions in an effort to move beyond the company’s mature
core business but doing so in a way that exploited the
company’s skills in brand management. He had explored six
possible related industries, in the general field of consumer
packaged goods, and determined that a promising small liquor
manufacturer, Bundaberg Rum, offered unusual opportunities
for real growth and, at the same time, market protection through
branding. He had identified Bundaberg Rum as a well-
established brand of liquor as the leading private Australian
manufacturer of rum, located in Bundaberg, Queensland.

10. The proposal was expensive: $1.5 million to buy the company
and $2.5 million to renovate the company’s facilities completely
while simultaneously expanding distribution to new
geographical markets. The expected returns were high: after-tax
cash flows were projected to be $13.4 million, yielding an IRR
of 28.7 percent. This project would be classed in the new-
product category of proposals.
Conclusion
Each member of the management committee was expected to
come to the meeting prepared to present and defend a proposal
for the allocation of Queensland Food Corp’s capital budget of
$8.0 million. Exhibit 3 summarizes the various projects in terms
of their free cash flows and the investment-performance criteria.
Exhibition 5 (See Attached)
1Project Number 6 not included
2
Equivalent 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.
3Reflects $1.1 million spent initially and at end of year 1
4Free cash flow = incremental profit or cost savings after taxes

11. + 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.
Case Study Questions (100 points)
1. Financial Analysis:
(25 points)
a. Which NPV of those shown in Exhibit 5 should be
used? Why?
b. Using all NPV forms presented in Exhibit 5, rank the
projects.
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.
d. List the projects that would be funded or unfunded
using the financial analysis (include Project 6 in your list)
2. Weighted Scoring Model Analysis
(60 points)
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):
i. List and define potential criteria
ii. List and define those criteria that are
mandatory (i.e., screening) criteria

12. iii. Weight the remaining criteria using an AHP
process
b. Which projects were screened from further
consideration in part 2a, ii?
c. Rank order the remaining projects based on the
group analysis.
3. Were the results different between the financial analysis
(Question 1) and the weighted scoring model (Question 2)
approach? If yes, why?
(5 points)
Mechanics
(10 points)
It is expected that the report will have excellent mechanics
(presentation, grammar and spelling) exhibit the quality of work
capable of a group of graduate students and working
professionals.
Your Instructor will use Turn-it-in to ensure your paper is
authentic work.
To avoid plagiarism, see the course home page for more
information and use the Purdue Online Writing Lab to learn how
to paraphrase, summarize and cite the references you use in all
academic writing assignments.
Submit your report to the group drop box in Moodle
A strategy for completing this assignment:

13. Assign one person with responsibility for completing question 1
and preparing the group report.
Assign four people with responsibilities for completing
questions2 and 3.
After drafts of all questions are complete, everyone should meet
to walk through and discuss the results before finalizing the
report.