PRINCIPLES OF PROJECT MANAGEMENT

PMGT – 510

CASE REPORT
QUEENSLAND FOOD CORPORATION

TEAM MBO’ers
KRUNAL SHAH
DANCHEN XU
ZEEL PATEL
HERISHKUMAR PATEL
KAUSTUBH PAWAR

29th July 2018

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TABLE OF CONTENTS

 Company Overview

 Problem Identification

 Resource Allocation

 Case Study Discussions

 Exhibits

 References

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Company Overview
Queensland Food Corp
Headquarter: Brisbane, Australia
Products: High Quality ice cream, yogurt, bottled water and fruit juices
Marketing Regions: States: Queensland, New South Wales,
Territories: ACT, Northern Territory

Problem Identification
 To allocate funds among range of projects up for nomination
 11 Projects up for consideration totaling over $20.8 million
 Spending Limit: $8 million
 Firm’s asset base: $65.6 million

 Static sales since 2000

 Management: Due to low population in Northern Territory and market saturation in some
areas
 Outsiders: Due to failures in new-product introductions

Resource Allocation

Capital Budget
Project Proposals Financial Tests
Committee
Project description Payback Period
5 Managing Directors

President Chief Executive Financial analysis

(CEO)
Internal Rate of Return
(IRR)
Chief Finance Officer Strategic/Qualitative
(CFO) consideration

Weighted-average cost of capital (2003): 10.5%

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Case Study Questions

1. Financial Analysis:

a. Which NPV of those shown in Exhibit 5 should be used? Why?

Both NPV at WACC and at minimum ROR could be used. While WACC is the actual cost of capital
to the company and is essential to make IRR calculations, NPV at minimum ROR gives a better
understanding of the risk return profile of each project. In general, a project whose IRR is greater
than equal to firm’s cost should be accepted and whose IRR is less than firm’s cost of capital
should be rejected.

b. Using all NPV forms presented in Exhibit 5, rank the projects.

The project with highest positive NPV should be given the highest priority over other projects.
In all the NPV forms, project with highest positive NPV has receive highest rank (Rank I)

Project NPV at Corp

Project Name Rank
ID WAAC (10.5%)
Distribution Truck Fleet
1 -0.192 Rank X
Replacement/Expansion
2 New Plant Construction 0.099 Rank VII
3 Existing Plant Expansion 0.028 Rank VIII
Fat Free(!) Greek Yogurt/Ice
4 0.521 Rank V
Cream Development/Introduction
Plant Automation and Conveyor
5 -0.087 Rank IX
System
Market Expansion West
7 1.199 Rank II
(Western Territory)
8 Market Expansion South (Victoria) 0.900 Rank III
Snack Food
9 0.895 Rank IV
Development/Introduction
Computer-based Inventory Control
10 0.116 Rank VI
System
11 Bundaberg Rum Acquisition 4.790 Rank I

Project NPV at Min

Project Name Rank
ID ROR
Distribution Truck Fleet
1 -0.013 Rank X
Replacement/Expansion
2 New Plant Construction 0.187 Rank VI
3 Existing Plant Expansion 0.055 Rank VIII
Fat Free(!) Greek Yogurt/Ice
4 0.388 Rank V
Cream Development/Introduction
Plant Automation and Conveyor
5 0.032 Rank IX
System

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 Market Expansion West
7 0.990 Rank II
(Western Territory)
8 Market Expansion South (Victoria) 0.710 Rank IV
Snack Food
9 0.731 Rank III
Development/Introduction
Computer-based Inventory Control
10 0.178 Rank VII
System
11 Bundaberg Rum Acquisition 4.143 Rank I

Project Equivalent
Project Name Rank
ID Annuity
Distribution Truck Fleet
1 -0.002 Rank IX
Replacement/Expansion
2 New Plant Construction 0.030 Rank VI
3 Existing Plant Expansion 0.009 Rank VII
Fat Free(!) Greek Yogurt/Ice
4 0.069 Rank V
Cream Development/Introduction
Plant Automation and Conveyor
5 0.006 Rank VIII
System
Market Expansion West
7 0.175 Rank II
(Western Territory)
8 Market Expansion South (Victoria) 0.125 Rank IV
Snack Food
9 0.129 Rank III
Development/Introduction
Computer-based Inventory Control
10 0.069 Rank V
System
11 Bundaberg Rum Acquisition 0.733 Rank I

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.

Although the waste water treatment plan does not have a NPV, it should be considered as
one of the most critical projects as it directly affects the company’s market image and
compliance with the legal regulations. Tightened regulations from Australian government and
risks of getting the pollution record public, thus tarnishing the company’s image makes this
project inevitable to undertake. Some projects cannot be evaluated on the grounds of financial
tests and requires qualitative selection criteria’s. In this case, the company could undertake
this project under its guiding principles such as corporate social responsibility mission
realizing its responsibility towards the community and environment. By promoting its
environmentally friendly processes, the company can set itself apart from its competitors and
attract new customers increasing its brand value, sales and market share.

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 d. List the projects that would be funded or unfunded using the financial analysis
(include Project 6 in your list)

Project approval is based on two financial tests – payback and internal rate of return (IRR).

Do Not
Pass
Project Payback Test IRR Test Pass
Project Name both
ID Status Status both
Tests
Tests
Distribution Truck Fleet
1 Fail Fail X
Replacement/Expansion
2 New Plant Construction Fail Pass X
3 Existing Plant Expansion Fail Pass X
Fat Free(!) Greek Yogurt/Ice
4 Cream Fail Pass X
Development/Introduction
Plant Automation and
5 Fail Pass X
Conveyor System
Market Expansion West
7 Pass Pass X
(Western Territory)
Market Expansion South
8 Pass Pass X
(Victoria)
Snack Food
9 Pass Pass X
Development/Introduction
Computer-based Inventory
10 Pass Pass X
Control System
11 Bundaberg Rum Acquisition Pass Pass X

Of all the projects that pass both tests, the projects would be selected per the project rankings.

However, if Project 6 –Waste water Treatment is selected based in the environmental category, Project
9 would be replaced by Project 6.

Hence projects that get funded = 11, 7, 6.

The projects which would be unfunded = 1,2,3,4,5,6,8,9,10

Note: Project 6 included in both due to management decision uncertainty.

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2. Weighted Scoring Model Analysis

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

 Strategic positioning: reposition that will promote the ongoing agenda and will advance
the greater goods for the company overall
 Probability of success: project aligns with the company's overall goal and will bring
monetary returns
 Market size: project is tailored to the size of the market
 Availability of staff: project will utilize company's employee capacity
 Customer satisfaction: improve service levels, results in more consistent and accurate
transactions, helps ensure services are delivered as promised and expected
 Employee satisfaction: improve employee's knowledge, efficiency, and effectiveness
with balanced workload
 Business Value: align with business goals, minimize potential risks, achieves results that
are critical to a specific business opportunity
 Process Effectiveness: streamline the use of technology to ensure the services are
delivered in a timely fashion with high quality, improve employee's efficiency, reduce non-
value-added activities

ii. List and define those criteria that are mandatory (i.e., screening) criteria

 Process Effectiveness: streamline the use of technology to ensure the services are
delivered in a timely fashion with high quality, improve employee's efficiency, reduce non-
value-added activities
 Market size: project is tailored to the size of the market
 Probability of success: project aligns with the company's overall goal and will bring
monetary returns
 Business Value: align with business goals, minimize potential risks, achieves results that
are critical to a specific business opportunity

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 iii. Weight the remaining criteria using an AHP process

Strategic Availability Customer Employee Total

%
Positioning of staff Satisfaction Satisfaction Votes
Strategic
*** 4 4 1 = 9 33
Positioning
Availability
1 *** 1 1 = 3 11
of staff
Customer
2 5 *** 2 = 9 33
Satisfaction
Employee
1 4 1 *** = 6 22
Satisfaction

b. Which projects were screened from further consideration in part 2a, ii?

Following projects cannot qualify to pass the screening criteria test. Company should omit them
out from nominated project list.

 Project 7 and project 8 Project Expansion South and West territory:

Company's current focus of introducing new product is not aligning with this project focus of
expansion. These projects are not adding business value and in addition probability of
success is also questionable. Company can entertain expansion only when they have access
budget which is not case this year.

 Project 2 New plant construction:

Project intent of expanding its same product line is not meeting business goal of introducing
new product or improving effectiveness of existing system. In addition, financials are also not
promising. Company can consider this project when their intention is to expand well
established product line.

 Project 3 Existing plant expansion:

Company currently looking to improve the effectiveness of currently existing facility. Instead
of expanding old plant company will focus on improving effectiveness of existing facility. This
project would have been selected if company has budget availability. Financial calculations
are not as promising to generate best business value.

 Project 4 Fat free Greek yogurt/ ice cream development:

Although project intent is aligning with company goal to introduce new product in to market;
Proposer is very uncertain about financial results which means company might end up tasking
big risk. Company does not have big budget available this financial year and company don't
want to spend on project that expose company to major risk.

 Project 11 Bundaberg Rum Acquisition:

This project intent is aligning with company's business goal to introduce new product in to
market but Risk Company taking is high because company's focus is on dairy products not
alcohol. Company know how dairy market works and they are comfortable introducing new

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 product in same category. By going with Alcohol product, company is exploring whole new
category which can be risky.

c. Rank order the remaining projects based on the group analysis.

The distribution truck fleet replacement/expansion, Computer-based inventory control systems,

snack food development/Introduction and water treatment were selected based on the defined
mandatory criteria. The reasons for the selection of these projects are as follows.

 Distribution truck fleet replacement/expansion:

This project is selected because it will increase the process effectiveness by decreasing the
delivery time to the company's major markets. This will also help to reduce the loss of sales
caused by delivering delay. Moreover, the new trucks will also have more space which will also
increase the capacity of delivery of products. The on-time delivery of the product will help to
achieve business goals and will also help to increase the customer satisfaction.

 Computer-based inventory control system:

One of the major problems the company is facing is the late delivery of their product which is
triggered by the improper management of the inventory control. The new computer-based
inventory control system will help to manage the inventory, and reduction of spoilage. This will
also help to optimize the process, better employee satisfaction, on-time delivery of the product
and ability to meet the customer level demand on time.

 Snack Food Development/Introduction:

The introduction of a new snack food line will help to increase the company's reputation and to
increase the sales of the company’s other product. This subsequently leads to increase the
market size for the company. The probability of success for this project is very high because IRR
for the launch is very high compared to other projects and other brand companies able to achieve
the success by introducing snack food development in their portfolio.

 Water Treatment:
Currently Queensland Food corp. drain dirty water into the rivers, this can raise the question
of environment, and water pollution by the Australian government in the future. This can affect
the company's image in the eye of consumers.

 Plant Automation:
The new proposed plant automation of production line will improve the speed and reduce the
accident, spillage and production tie-ups. This project will help to improve the operation
efficiency.

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 The screened projects are assessed based on the defined mandatory criteria. Below is the table
for the weighted score model analysis where less the number value is less effective of the project
in defined mandatory criteria.

Project Name Criteria

Process Probability of Business
Market Size Total
Effectiveness Success Value
Distribution truck fleet
10 10 5 10 45
replacement/expansion
Computer based
10 5 5 10 30
inventory control system
Snack food
5 5 5 10 25
development/introduction
Water treatment 5 5 10 10 30
Plant Automation 10 5 5 10 30

Based on the weighted scoring model analysis model, project for distribution truck feet
replacement/expansion is selected.

3. Were the results different between the financial analysis (Question 1) and the weighted
scoring model (Question 2) approach? If yes, why?

The results were certainly different between the financial analysis and the weighted scoring model. The
reason is that the projects are evaluated using different sets of selection criterion. While the financial
analysis focusses on a project’s monetary returns in future, the scoring model approach focusses on
project alignment with the company’s business objectives

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Exhibits

Exhibit 2 Summary of Financial Results (millions AUD except per share amounts)

End of Fiscal Year

2000 2001 2002
Gross Sales $100.8 $100.7 $100.8
Net Income 5.1 4.9 3.7
Dividends 2.0 2.0 2.0
Earnings Per Share 0.85 0.82 0.66
Shareholders’ Equity (Book Value) 18.2 20.6 23.5
Shareholders’ Equity (Market value) 45.3 39.0 22.9
Total Assets 47.7 58.0 65.6

Exhibit 3 Company Policy for Project Approval

Project Type Minimum Acceptable Maximum Acceptable

IRR Payback (Years)
1. Market/Product Extension 12% 6
2. New Product/Markets 10% 5
3. Efficiency Improvements 8% 4
4. Environmental/Safety Not required Not Applicable

Exhibit 4: Project Proposals

Project Cost
Project Description Project Type
ID (Millions)
Distribution Truck Fleet
1 2.2 Efficiency (or Expansion)
Replacement/Expansion
2 New Plant Construction 3.0 Market Extension
3 Existing Plant Expansion 1.0 Market Extension
Fat Free(!) Greek Yogurt/Ice Cream
4 1.5 New Product
Development/Introduction
5 Plant Automation and Conveyor System 1.4 Efficiency
Environmental
6 Wastewater Treatment (4 plants) 0.4
Compliance
7 Market Expansion West (Western Territory) 2.0 New Market
8 Market Expansion South (Victoria) 2.0 New Market
9 Snack Food Development/Introduction 1.8 New Product
10 Computer-based Inventory Control System 1.5 Efficiency
11 Bundaberg Rum Acquisition 4.0 New Product

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 Exhibit 5 Free Cash Flow and Analysis of Proposed Projects (Note 1) ($ millions AUD)
Project 1. 2. 3. 4. 5. 7. 8 9 10 11

Distribution New Plant Existing Yogurt/ Ice Plant Market Market Snack Food Computer- Bundaberg
Truck Fleet Construction Plant Cream Automation Expansion Expansion Development/ based Rum
Replacement/ Expansion Development/ (Western South Introduction Inventory Acquisition
Expansion Introduction Territory) (Victoria) Control (Note 5)
System
(Note 3)
Investment
Property 2.0 2.5 1 1.5 1.4 0 0 1.5 1.5 3.0
Working Capital 0.20 0.50 0 0 0 2.0 2.0 0.30 0 1.0
Year Expected Free Cash Flow (Note 4)
0 -1.14 -3.0 -1.0 -0.50 -1.4 -2.0 -2.0 -1.8 -1.2 -1.5
1 -0.79 0.20 0.125 -0.50 0.275 0.35 0.3 0.3 0.55 -2.0
2 0.30 0.50 0.150 -0.50 0.275 0.4 0.35 0.4 0.55 0.50
3 0.35 0.55 0.175 0.3 0.275 0.45 0.4 0.45 0.50 0.90
4 0.40 0.60 0.20 0.3 0.275 0.5 0.45 0.50 1.1
5 0.45 0.63 0.225 0.4 0.275 0.55 0.5 0.50 1.3
6 0.50 0.65 0.25 0.45 0.275 0.6 0.55 0.50 1.5
7 0.70 0.675 0.15 0.5 0.275 0.65 0.6 0.50 1.7
8 0.50 0.15 0.55 0.7 0.65 0.50 1.9
9 0.53 0.15 0.6 0.75 0.7 0.50 2.1
10 0.55 0.15 0.65 0.8 0.75 0.50 5.9

Undiscounted 0.77 2.375 0.725 2.25 0.525 3.75 3.25 2.85 0.4 13.4
Sum
Payback (Years) 6 6 6 7 6 5 6 5 3 5
Max Payback 4 6 5 5 4 6 6 6 4 6
Accepted
IRR 7.8% 11.3% 11.2% 17.3% 8.7% 21.4% 18.8% 20.5% 16.2% 28.7%
Min Accepted 8.0% 10.0% 10.0% 12.0% 8.0% 12.0% 12.0% 12.0% 8.0% 12.0%
ROR
NPV at Corp -0.192 0.099 0.028 0.521 -0.087 1.199 0.900 0.895 0.116 4.79
WAAC (10.5%)
NPV at Min ROR -0.013 0.187 0.055 0.388 0.032 0.990 0.071 0.731 0.178 4.143
Equivalent -0.002 0.030 0.009 0.069 0.006 0.175 0.125 0.129 0.069 0.733
Annuity (Note 2)

1Project Number 6 not included

2Equivalent 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 + 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.

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References

Retrieved from

https://xplaind.com/595242/discount-rate

https://www.investopedia.com/terms/w/wacc.asp

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