Business

Topics: Net present value, Investment, Capital budgeting Pages: 2 (445 words) Published: November 10, 2014
Question:

*Must prepare a spreadsheet for the base case NPV and some sensitivity analysis.  *And you have to prepare a 1 page analysis that answers the questions given for LAURENTIAN BAKERIES.  (Make sure to answer questions stated in Decision problems Section on the case.)

Solution:
Base case of npv and Sensitivity analysis is in the spreadsheet NPV is $ 8,340,451.

Analysis for LAURENTIAN BAKERIES
Laurentian bakeries are a renowned company in a food industry in U.S. frozen pizza market. The Company was preparing a capital budgeting proposal to expand the company’s frozen plant in Winnipeg, Manitoba. The company has estimated net income of the three year from 1996 to 1998.The initial cash outlay at the start of 1996 is $ 5.2 million which include building, new high speed pizza space, additional warehouse space, and contingency need. As the Laurentian bakeries in the industry from the past 12 years since 1984, they take the advantage in capturing the profit in the industry. The present value of cash inflow is $8,340,451. So, the Net Present Value (NPV) of the project is $3,140,451 which is good for the Laurentian bakeries. They accept the proposal to expand the company’s frozen plant. This is very good for expand the company’s frozen plant as they expand their base plan to diversify their project. Actually they are very renowned firm in the Canada in the major segment of the pizza market. They are one of the five largest firm accounted for 95 percent of production. While Laurentian bakeries has 21 per cent market leadership and there is great need to invest in this project and maximize their market leadership in the industry.

While making sensitivity analysis of Laurentian bakeries, it is seen that while the net income is decrease by 16%, the NPV of the project is decrease by 107%. This means that decrease in net income will cause triple decline in the net present value assuming that cash inflow remain constant. This is a danger sign for company...
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