Valentina is the new CEO of Southern Hemisphere Frozen Foods (SHFF), which specialises in ice-cream, frozen yogurt and other associated frozen products. SHFF operates in two main regions: Australia and New Zealand. One of the first actions Valentina took when she commenced the CEO role, was to put in place a set of strategic themes. These strategic themes would guide decision-making and the structure of the performance management system. The strategic themes are in Table 1.
|Table 1: SHFF Strategic Themes|
|1||Maintain our position in top three frozen food companies in the Southern Hemisphere through innovation and enhanced competitiveness|
|2||Seek growth and improved financial performance through targeted expansion and acquisition|
|3||Be a good corporate citizen with due recognition to the environment, along with the social and ethical impact of our activities.|
Valentina is enthusiastic about the growth prospects of SHFF and believes investment is the key. She has asked the accounting department to undertake a review of the capital investment evaluation process and recommend a new model of evaluation that would be suitable for the evaluation of strategic capital investment proposals. Currently, all capital investment proposals are expected to meet the following criteria to be considered for investment:
Net present value, which must be positive
Payback period, which must be less than five years
At Valentina’s request, the accounting department has established a new set of criteria to drive the construction of the new strategic capital investment evaluation model:
Must be applicable across the organization, capable of capturing the specific attributes of different kinds of strategic capital investments;
Must include both financial and non-financial criteria, with a total of FOUR criteria;
Non-financial criteria must be able to be quantified;
The number of non-financial criteria should be limited to a maximum of three;
Use a benchmark weighted index as a minimum requirement for investment; and
Reflect the strategic themes of SHFF.
The accounting department now seeks your assistance and expert advice. Two recent proposals have been provided to assist. These two proposals were competing for the same investment funds in the last twelve months but were not successful.
Two sample proposals
Proposal 1 – Expansion of the Australian operation to neighbouring Pacific nations
The head of the Australian region, Penny Reed, is very keen to expand SHFFs Australian operations to the broader Pacific and in particular pacific island nations such as Fiji. Penny believes this will facilitate significant growth in the Australian region operations. The downside seems to be the problem of distance and managing the related logistics. Moreover, Penny has encountered some difficulties in negotiations with local authorities relating to the disposal of waste from the production processes, along with some tension over pay-rates for locals working on the project. While some production will occur locally in Fiji, a significant portion of the product offerings will be imported from Australia. From analysis undertaken, there would seem to be a low-level likelihood of competitors seeking to expand to places like Fiji.
Proposal 2 – Acquire a cheese and yogurt business
The head of the New Zealand operations, Michael Desi, has identified a cheese & yogurt making business with 15 processing plants distributed throughout the south island of New Zealand. Diversification into cheese & yogurt would yield significant synergies. Firstly, milk prices have been highly volatile, and the diversification would make it easier to manage the volatility. Secondly, there is a growing recognition by consumers of dairy foods as nutritious and natural snacks. The popularity of flavoured [unfrozen] yogurt as well as ‘free from lactose’ and ‘organic’ cheese is growing. Cheese and yogurt snacks may be sold and distributed in parallel with SHFFs ice-cream and other frozen food products. An assessment of the industry suggests two alternate international buyers are also interested in the investment opportunity. Moreover, current environmental ratings for the plants is in the low-level risk category.
A summary of the key financial and related information for each proposal is provided in Table 2.
|Table 2: SHFF investment proposals|
|Proposal 1: Expansion to Pacific Islands||Proposal 2: Acquisition of cheese and yogurt businesses|
|Project life||10 years||10 years|
|Investment cost||$15 million||$18million|
|ROI in first two years||2%||4%|
|ROI over life of project||12%||16%|
|Payback period||8 years||6 years|
1. Briefly explain why it might have been necessary for Valentina to seek a new strategic capital investment evaluation model? How do you think decision-making will be improved through the use of this new model? 4 marks
2. Based on the criteria and other information in the case, develop a suitable strategic capital investment evaluation model. Use a Table to clearly illustrate the structure and components of the model. Briefly justify the criteria selected. 6 marks
3. Demonstrate the suitability of the model through an evaluation of Proposal 1. Should the project be considered for investment? 5 marks
4. What are the dangers in using a fully quantified decision model like the one you have developed for use at SHFF?
3 months ago
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