Laurentian Bakeries Solution Essay Sample
Direction:
You need to analyse the instance and come up with the recommendation with respects to the capital budgeting determination.
Premise: Inflation rate is 4 %
Discussion Guideline:
1. What is the quandary faced by the direction of Laurentian Bakeries?
2. Remark on the Laurentian Bakeries’ ‘Project Review Process’ . Is it a sound procedure?
3. What are the alternate investing chances? Why are those options non chosen?
4. Remark on the expected incremental gross revenues degree ( e. g. certainty degree ) .
5. How would you integrate the undermentioned information in your analysis?
I. Gross saless monetary value with rising prices.
two. The land cost ( $ 250. 000 )
three. Cost associated with administrative staff ( $ 223. 000 )
four. Gross saless staff clip in procuring the contract ( $ 40. 000 )
v. Cost economy due to new line ( $ 0. 019 per unit plus $ 138. 000 per twelvemonth )
six. Operating border of 15 % .
seven. Working Capital: Decrease in mean stock list age ( by two yearss ) Hint: Find out the current on the job capital demands in footings of gross revenues yearss. What will be the net on the job capital each twelvemonth?
eight. Cost of Capital: Beta = 0. 85 ; the spread of 2 % ; difference in market return and long-run authorities bond of 6 % . What is the cost of capital for Laurentian Bakeries? How does it differ from the hurdle rate? nine. Entire hard currency spending of $ 5. 2 million and matching CCA values.
ten. Ongoing capital outgo to be equal to one-year depreciation.
6. Work on the item hard currency flow of the undertaking ( Year 0 = 1995 ; runing old ages: 1996-2005 ) .
7. Scenario analysis: Think about different scenarios – optimistic. pessimistic etc.
8. What is your determination? Are you losing out any benefit ( s ) or cost ( s ) ?
Relevant expression for working capital computation:
Working Capital Needs ( as yearss of gross revenues ) :
Acc. Rec. / ( Revenue/365 ) + Inventory/ ( Revenue/365 ) – Acc. Payable/ ( Revenue/365 )
