National Foods Corporation Issue Reviewing capital expenditure procedure for the three major divisions of the company

Objective Competitive advantage and growth in the product areas in which they chose to compete Discrepancies The company used a single after-tax cost of capital for a hurdle rate regardless of the division from which a capital proposal emanated. Even the setting up of that rate or the change of that was largely subjective. Solution measures A study of the transfer prices of capital among divisions was commissioned. The proposal was to use multiple required rates of returns. Company background Timeline Year Event Late 19th century National Foods Corporation began as a processor of corn and wheat 1920s began to brand certain wheat and corn products 1924 became a public corporation Major divisions National Foods Corporation

Agricultural Products

Bakery Products

Restaurant

The agricultural products division traces its origin to the very beginning of the company. The company started as a processor of corn and wheat and gradually changed from commodity type products to branded items. At present, the company is a seller of branded wheat and corn products, flour, margarine, corn meal, cake and biscuit mixes. The company divested certain pure commodity-type businesses: bean cleaning and wholesaling, the distribution of corn for hog and cattle feeding and the distribution of wheat to other food processors. Though a few commodity operations remain, the emphasis is on branded agricultural products. The bakery products division consists of entirely branded products that include bread, rolls, biscuits, muffins, pizza crusts, some crackers and an extensive line of cookies.

Having intense competition, National Foods Corporation achieved product dominance in a number of lines except the cracker and cookie lines where Nabisco has been dominant and aggressive. As a whole, the division is profitable. The restaurant division has enjoyed impressive growth in recent years. The division itself is operated as an independent entity and is extremely aggressive. As the U.S. population has changed demographically as well as employment-wise over the last 20 year, expenditures for food away from home have increased. This was particularly true in the 1970s and early 1980s. Throughout this timeframe there was a rapid expansion of this division. Given to splashy advertising and promotion devices, the division's overall culture is different from that of the company. With the rapid growth, it has become a larger part of total sales and operating profit. Capital investment procedures

Capital budgeting request emanating from divisions

Routine expenditure

Major expenditure

Lumped together

Check value additions: Cash flow, Payback, IRR

Check risk: Quantitative measures

Corporate analysis & control office

Board of Directors

Setting of hurdle rate

Projects

Cash flows can be estimated and discounted cash flow methods are employed

Do not provide measurable return, rather necessary to keep the business going

Profit adding

Profit sustaining

13%

15%