This document provides information for a workshop assignment on Laurentian Bakeries. It includes: 1. An overview of the company and its products. 2. Details on the capital structure and weighted average cost of capital calculation. 3. Facts about a proposed project to improve operations, including benefits, costs, and cash flow projections under different scenarios. 4. A recommendation to pursue the project due to its positive NPV and IRR, as well as potential for brand establishment in the larger US market.

1. Presenters
8606323 – Stephen Baines
8723204 – Li Chen
8723145 – Yumeng Chen
8623962 – Nina Khade
8623963 – Donny Masril
Workshop Assignment CF
Workshop Date: 21st
October 2013
Group 3: Laurentian Bakeries

2. Topic
Company Overview
Capital Structure and Working Average Cost of Capital
Project Fact
Cash Flow Analysis
Assumptions
Recommendations

3. Company Overview
Equally contributed to profits in fiscal 1994
Established in 1984, Laurentian Bakeries manufactures frozen
Product Price Place Promotion
- Frozen pizza
- Deli-fresh
chilled pizza
- Restaurant
pizza
- Take-out pizza
- $1.70
- $1.77
- $1.84
- Canadian
grocery chain
- Low cost
- 21% Market
Share

4. Capital Structure and WACC
Supporting Information Value
Rf Risk Free Rate 8.06%
Beta Beta 0.85
Rp Risk Premium 6%
E/V % Equity Finance 60%
D/V % Debt Finance 40%
Tc Corporate Tax Rate 18.9%
Year Debt Interest % Interest
1993 16.8 0.9 5.36%
1994 20.4 1 4.90%
1995 24.3 1.6 6.58%
Weighted Average Cost of Capital
WACC = E / V x Re + D / V + Rd x ( 1 – Tc )
WACC = 0.6 x 0.1316 + 0.4 + 0.0561 x ( 1 -
0.189)
WACC = 9.7173%
Cost of Equity
Cost of Equity (Re) = Rf + Beta + Rp
Cost of Equity (Re) = 0.0806 + 0.85 + 0.06
Cost of Equity (Re) = 0.1316
Cost of Debt
Cost of Debt (Rd) = Average of 0.0536,
0.049, 0.0658
Cost of Debt (Rd) = 0.0561

5. Project Facts
• Project constraints:
• Be consistent with business strategies
• Support continuous improvement
• Consider the human resource and environment impact
• Provide a sufficient return on investment
• Strategic Plan – Identification and removal of ‘lost opportunity’ and inefficiencies
• Operating Plan – Identification of Continuous Improvement Initiatives
• Proposal: six months to complete
• Benefits from project
• $0.019 unit cost saving for plant-wide
• $138,000 annual savings on others
• Environment improvements
• Sanitation drain system
• Water flow recording meters
• Ammonia refrigerators

6. Capital Cost Allowance
Year Opening Balance Depreciation Closing balance CCA Deduction Rate CCA
1
2,900,000.00 290,000.00 2,030,000.00
30%
870,000.00
2
2,030,000.00 290,000.00 1,421,000.00
30%
609,000.00
3
1,421,000.00 290,000.00 994,700.00
30%
426,300.00
4
994,700.00 290,000.00 696,290.00
30%
298,410.00
5
696,290.00 290,000.00 487,403.00
30%
208,887.00
6
487,403.00 290,000.00 341,182.10
30%
146,220.90
7
341,182.10 290,000.00 238,827.47
30%
102,354.63
8
238,827.47 290,000.00 167,179.23
30%
71,648.24
9
167,179.23 290,000.00 117,025.46
30%
50,153.77
10
117,025.46 290,000.00 81,917.82
30%
35,107.64
Total
2,818,082.18
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/cca-dpa/menu-eng.html

7. Cash Flow (Scenario 1, simplified view)
Year
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0 1 2 3 4 5 6 7 8 9 10
Sales Revenue $- $2.008.000,00$3.641.520,00$4.971.518,80 $5.172.393,55
$5.381.303,2
9 $5.598.569,43$5.824.526,20$6.059.521,25$6.303.916,10 $6.758.086,75
Operating
Expenses $5.200.000,00 $1.831.774,91$2.952.992,56$4.018.873,75 $4.129.278,70
$4.244.099,8
5 $4.363.513,84$4.487.704,40$4.616.862,57$4.751.187,07 $4.890.884,56
Changes in
Working Capital $166.582,32 $136.294,63 $98.435,01 $- $- $- $- $- $- $- $-401.311,96
Capital
Expenditure $- $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00
Salvage Value $- $- $- $- $- $- $- $- $- $- $-
Taxes $- $- $- $- $124.135,66 $175.451,81 $205.789,76 $233.314,30 $259.120,97 $283.986,72 $346.265,87
After Tax Cash
Flows $-5.366.582,32 $10.930,46 $561.092,43 $923.645,05 $889.979,19 $932.751,64 $1.000.265,83$1.074.507,51$1.154.537,71$1.239.742,30 $1.893.248,28
Scenario: Mid-inflation (4%), stabilized sales after year 3

8. Cash Flow (Scenario 2, simplified view)
Year
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0 1 2 3 4 5 6 7 8 9 10
Sales Revenue $- $2.008.000,00 $3.641.520,00 $4.971.518,80 $5.172.393,55 $5.381.303,29 $5.598.569,43 $5.824.526,20 $6.059.521,25 $6.303.916,10 $6.758.086,75
Operating Expenses $5.200.000,00 $1.831.774,91 $2.952.992,56 $4.018.873,75 $4.129.278,70 $4.244.099,85 $4.363.513,84 $4.487.704,40 $4.616.862,57 $4.751.187,07 $4.890.884,56
Changes in Working
Capital $166.582,32 $136.294,63 $98.435,01 $- $- $- $- $- $- $- $-401.311,96
Capital Expenditure $- $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00
Salvage Value $- $- $- $- $- $- $- $- $- $- $-
Taxes $- $- $- $- $124.135,66 $175.451,81 $205.789,76 $233.314,30 $259.120,97 $283.986,72 $346.265,87
After Tax Cash Flows
$-
5.366.582,32 $10.930,46 $561.092,43 $923.645,05 $889.979,19 $932.751,64 $1.000.265,83 $1.074.507,51 $1.154.537,71 $1.239.742,30 $1.893.248,28
Scenario: High-inflation (5%), stabilized sales past year 3

9. Cash Flow (Scenario 3, simplified view)
Year
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0 1 2 3 4 5 6 7 8 9 10
Sales Revenue $- $2.008.000,00 $3.641.520,00 $4.971.518,80 $5.322.908,42 $5.699.192,94 $6.102.139,29 $6.533.639,96 $6.995.721,94 $7.490.556,29 $8.220.468,35
Operating Expenses $5.200.000,00 $1.831.774,91 $2.952.992,56 $4.018.873,75 $4.253.157,06 $4.502.565,53 $4.768.129,39 $5.050.950,83 $5.352.209,08 $5.673.165,84 $6.015.171,10
Changes in Working
Capital $166.582,32 $136.294,63 $98.435,01 $12.039,36 $12.400,54 $12.772,56 $13.155,73 $13.550,40 $13.956,92 $14.375,62 $-493.563,09
Capital Expenditure $- $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00
Salvage Value $- $- $- $- $- $- $- $- $- $- $-
Taxes $- $- $- $- $129.169,96 $186.682,94 $224.492,12 $260.883,22 $297.082,41 $334.007,73 $410.165,84
After Tax Cash Flows
$-
5.366.582,32 $10.930,46 $561.092,43 $911.605,69 $899.180,86 $968.171,92 $1.067.362,04 $1.179.255,50 $1.303.473,53 $1.440.007,10 $2.259.694,51
Scenario: Mid-inflation (4%), increased sales of 3% past year 3

10. Cash Flow (Scenario 4, simplified view)
Year
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0 1 2 3 4 5 6 7 8 9 10
Sales Revenue $- $2.008.000,00 $3.641.520,00 $4.971.518,80 $5.021.878,68 $5.072.809,40 $5.124.325,19 $5.176.440,65 $5.229.170,78 $5.282.530,96 $5.536.537,02
Operating Expenses $5.200.000,00 $1.831.774,91 $2.952.992,56 $4.018.873,75 $4.005.400,34 $3.993.273,55 $3.982.461,27 $3.972.932,43 $3.964.656,98 $3.957.605,82 $3.951.750,82
Changes in Working
Capital $166.582,32 $136.294,63 $98.435,01 $-12.039,36 $-11.678,18 $-11.327,83 $-10.988,00 $-10.658,36 $-10.338,61 $-10.028,45 $-324.253,18
Capital Expenditure $- $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00 $29.000,00
Salvage Value $- $- $- $- $- $- $- $- $- $- $-
Taxes $- $- $- $- $119.101,36 $164.552,63 $188.176,53 $208.118,03 $225.451,59 $240.931,79 $292.889,25
After Tax Cash Flows
$-
5.366.582,32 $10.930,46 $561.092,43 $935.684,41 $880.055,16 $897.311,05 $935.675,39 $977.048,55 $1.020.400,81 $1.065.021,80 $1.587.150,13
Scenario: Mid-inflation (4%), decreased sales of 3% past year 3

11. Cash Flow (IRR graphs all scenarios)

12. Assumption Probability Expected Return Expected Rate of Return on project %
50% guarantee of receiving order 0.5 0.03 0.015 2%
50% guarantee of losing order 0.5 -0.4 -0.2 -2%
Probability vs expected rate of return

13. Assumptions
Assumption that corporate tax rate is 18,9% as per 1995 in Montreal, Quebec (
http://www.ormack.com/corp95.html)
Sales go through Montreal HQ (lower tax rate compare to Winnipeg, Manitoba)
Assumption that 50% contingency will be used
•At 100% NPV = $83,713.43 ; IRR = 10%
•At 0% NPV = $212,043.41; IRR = 10.44%
$40k sunk cost exclude
Analysis does not include salaries
Assumption is that only equipment depreciates
Working Capital is recovered at the end
Land could be sold (opportunity cost)

14. Assumptions (cont.)
Break even based on scenario 1 (including assumptions)

15. Recommendations
But…
So…
NPV: $147.878,42; IRR: 10.34%; Hurdle rate: 18% too high!
US market is lucrative (3 times more pizza consumption than Canada)
Side non-financial benefits of entering new market
•brand establishment,
•huge market potential,
•potential increase of market,
•potential to market other products
Other three alternatives are too costly
It is recommended to take the project

16. Questions?