A Financial Evaluation of Mccain Foods Finance Essay

Among all the frozen chips producers in the world 'McCain food,' is the best. They are the largest frozen chips producers around the world. McCain food first starts their journey in New Brunswick, Canada in 1957. After some research and development they enter in the UK market at 1960's. They start their journey as a frozen chips producers in the UK market. Now they became the market leader in the UK. Their market share is almost 45%. They sold almost 45% of frozen potatoes in the UK market. The demand of the McCain food is growing up because of its quality, smooth service, and has a very good relation with the customer as well as suppliers. They always try to cope up with the new technology for upgrading the service and product. So their demand will grow up again and again in the UK market. So now they need to invest in new technology to increase the production which will also enable to meet the demand of customer and to cut down the cost effectively. From now to onward we already understand that McCain food is the production based company. So to be an effective production based company you have to expand a lot for the machineries, for the new technologies, for the labour force, and for the good reputation of the company. And this expenditure is varied from time to time. Like it depends on the product quality and quantity as well as during the season McCain foods have to face different types of problem. So the cost of a production based company like McCain frozen potato is also different. We can define McCain food cost like, variable cost (includes cost of potatoes, cooking oil, employee wages etc) and fixed cost (includes office maintenance, marketing etc.). The McCain food company has it lager production plan in Cambridgeshire which uses lots of energy for its production process. Now the company are seeking ways to reduce their energy use. For this reason they want to invest on two new projects to set up renewable sources of energy for its Whittles plant. The main objectives of this project are (1) to reduce the energy use which results in reducing the production cost. (2) To maintain the corporate social responsibility by making the projects more environment friendly. Thus they intended to keep their reputation and brand name much stronger than ever before. McCain food is always looking for the customer reliability, company reputation and viable engineering company to undertake the projects. There are two companies named Omega Alternatives and Alpha Renewable is interested to undertake the project work. Both companies are now biding for those projects. Before giving the projects to one of the above-mentioned company, McCain is now going to examine which company is more reliable and financially viable for their upcoming projects.

Objectives of this report:

The core objectives of this report are as follows: To examine critically all the internal factors of an investment appraisal , such as, NPV, ARR, IRR, PP etc in order to evaluate which project will be more viable, feasible and suitable to be accepted. To find out of the company financial investigation on the two parents companies that could eventually make the right decision of which company can be selected. Find out a linear relationship between cost savings and year of operation.

Methodology:

Most of the companies have some basic objectives and some core value. To achieving this core Value Company works. So the main goal of the objective of this report is to find out the investment appraisal in order to assess and evaluate the feasibility and viability of the project. So this following aspect can be taken to find out all those- 1. To find out critically all the factors in an investment appraisal, such as NPV (Net present value), ARR (Accounting rate of return), IRR (Internal rate of return), PP (Pay back period) etc in order to evaluate this report and it will be more suitable and feasible and accept. 2. To carry out the financial investigation on the two respective companies that could eventually make the right decision of which company should be selected. 3. To make out a linear relationship between cost savings and year of operation.

No. 1: Investment Appraisal

Investment Appraisal Method includes the Average Rate of Return (ARR), the Payback Period (PP), Net Present Value (NPV), and Internal Rate of Return (IRR) techniques.

Account Rate of Return (ARR)

The ARR shows the return on investment. This method is based on accounting information rather than cash flows. It is the ratio which can express the earnings before interest and tax as a percentage of the capital employed at the end of an accounting period. That is why, this method is also called the return on capital employed (ROCE) or the return on investment (ROI).

Advantage

Easy to understand and calculate Necessary information to calculate average rate of return are available. Can take into account all the profits during the life time of the report. Can use accounting data with which executives are similar. Earning of each year is included in the calculating the profitability of the project.

Disadvantage

Ignore the time value of money Does not use cash flow No objective way to determine the minimum acceptable rate of return Does not account for the profits arising on sale of profit on old machinery on replacement. It is a relative measure rather than an absolute measure and hence takes no account of the size of the investment. It does not take account of the timing of the profits from an investment.

Payback period (PP) Method

Payback period is simply means how long a business will take to pay back its initial investment. It is also often used as first screening method.

Advantage

PP is important because long PP means capital tied up and is a risk. Payback period method is simple and easy to calculate and apply for small as well as repetitive investments. Payback period method takes into account tax and depreciation. It is easy and quick method and the concept is easily understood.

Disadvantage

In payback period method, it ignores the timing of cash flows within the payback period, the cash flows after the end of payback period and therefore the total project return. Payback it is unable to distinguish between projects with the same payback period. It is unable to distinguish between projects with the same payback period. It may lead to excessive investment in short-term projects.

Net Present Value (NPV)

NPV is one method of determining how much value an investment adds to a company. It means the present value of cash inflows minus the present value of cash outflows.

Advantage

Considers the time value of money It gives an absolute value Considers the risk of future cash flows (through the cost of capital)

Disadvantage

It requires an estimate of the cost of capital in order to calculate the net present value. It is very difficult to identify the correct discount rate As a method of investment appraisal NPV requires the decision criteria to be specified before the appraisal can be undertaken.

Internal Rate of Return (IRR) Method

Internal rate of return Method is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate return or simply the rate of return.

Advantage

Internal Rate of Return says whether an investment increases the firm's value. It considers the time value of money and is therefore more exact and realistic than accounting rate of return. All cash flows of the project is Considered The risk of future cash flows is considered.

Disadvantage

Internal Rate of Return requires an estimate of the cost of capital in order to make a decision In limited cases, where there are multiple reversals in the cash flows streams, the projects could yield more than one internal rate of return. Requires an estimate of the cost of capital in order to make a decision Some time not give the value-maximizing decision. The following attributes are taken into consideration for financial analysis: 1) Profitability ratios, which includes: Return On Capital Employed (ROCE), can be measured as- Profit before interest and tax (PBIT) Capital Employed (Total Asset - current Liability ROCE = x 100. Capital Employed, can be measured as- Turnover Capital employedCapital turnover = Net profit margin, can be measured as- Profit before interest and tax (PBIT) Turnover Net profit margin = x 100 Gross profit margin, can be measured as- Gross profit TurnoverGross profit margin = x 100 2) Liquidity and efficiency ratios, which includes- Current assets - StockAcid test can be measured as- Current liabilityAcid test = Stock turnover can be measured as- Cost of sales Average stock Stock turnover = Debtor collection period, can be measured as- Trade debtors Turnover Debtor collection period = x 365 days Creditor payment period, can be measured as- Trade creditors Cost of Sales Creditor payment period = x 365 days

The outcomes-

WIND URBINES WASTE LAGOON Year0 100 Y0 50 Year1 26 1 25 Y1 13.7 .5 13.2 Year2 28 1 27 Y2 13.9 .5 13.4 Year3 30 1 29 Y3 16 1 15 Year4 32 2 30 Y4 18 1 17 Year5 34 2 32 Y5 19 1 18

LINEAR REPRESENTATION AND COST SAVINGS ANALYSIS-

In this cost savings chart of the two projects present above in a linear graph and table, it is indicated that Waste Lagoon is more perfect than Wind Turbine project for this one. Initially the investment cost for Wind Turbines is 100 million pound on the other hand Waste Lagoon requires 50 million pound. After that in the first year and second year the cost for Wind Turbine is 26 and 28 million pound respectively while Waste Lagoon requires 13.7 and 13.9 million pound respectively. This difference is clearly noticeable up to the last year. In the final year the cost for Wind Turbine is 34 million pound whereas Waste Lagoon requires 19 million pound only. So from the comparison of the two projects it can be said that Waste Lagoon might be accepted than the Wind Turbine. A) The following findings are resulted from the calculations of investment appraisal techniques:

Methods

For Wind turbines

For waste lagoon

ARR 28.6% 30.64% PP 3 yrs 6 months 3 yrs 4 month NPV -5.72 0.14 IRR 13.33% 17.14% B) The following findings are resulted from the calculations of financial analysis of the two companies- Methods

Omega Alternatives PLC

Alpha renewable PLC

2008

2007

2008

2007

ROCE 20.77% 21.32% 39.15% 39.06% Capital turnover 1.7x 1.6x 2.5x 2.4x Net profit margin 11.88% 13.15% 15.56% 15.95% Gross profit margin 13.46% 15.08% 58.12% 58.62% Acid test 1.03:1 1.47:1 1.09:1 1.14:1 Stock turnover 2.2x 2.3x 2.0x 1.8x Debtor collection period 89days 81days 36days 34days Creditor payment period 52days 43days 133days 142days

Discussion

In the table 'A' it clearly shows that, we can see that ARR of Waste Lagoon is higher than the Wind Turbine, which is, (30.64% > 28.6%). It also shows that Waste Lagoon Project is more suitable to carry out. Although the Payback Period of waste lagoon is less than the wind turbine, the rest of the attributes such as NPV and IRR suggest that Waste Lagoon Project is more suitable and acceptable than Wind Turbine. Because, in the table 'A' we notice that, the NPV findings of Wind Turbine is negative (-5.72) than the Waste Lagoon (0.14) and the IRR findings of Wind Turbine is more less (13.33%) than the Waste Lagoon Project (17.14%). Therefore, we can say that since the NPV result of Wind Turbine is negative so this project should be rejected and avoided. Again, in the table 'B' we can see that the results of Stock Turnover and Debtor Collection Period method of Omega Alternative PLC are much higher than Alpha Renewable PLC. But the rest of the ratios regarding Omega Alternatives PLC are less than Alpha Renewable PLC. For examples, the ROCE of Omega Alternatives were 20.77% and 21.32% in the year of 2008 and 2007 respectively whereas the ROCE of Alpha Renewable PLC were 39.15% and 39.06% in the same year. Likewise, the ratios regarding the Capital Turnover, Net Profit Margin, Gross Profit Margin, Acid Test, and Credit Payment Period of Omega Alternatives PLC are comparatively more less than the Alpha Renewable PLC. The above critical analysis suggests that the company named Alpha Renewable is comparatively apt and fit to run the project work effectively.

Conclusion

After examining all the above-mentioned facts, we can say that McCain Food's upcoming project waste lagoon is more suitable and viable to undertake the project and Alpha Renewable PLC is likewise more probable and prospective company to carry out the responsibilities and liabilities. For a company like McCain, it is notable that they should think not only the business but also their brand image, their corporate social responsibility for the well being of the company and the society as a whole. So whenever McCain is going to give the priority to any of the company for their project, they should also consider the company which is beneficial for them as well. In this report, it can be said that two companies which are bidding for the upcoming project are more or less efficient to accomplish the project. But whenever it is the question of choice of the best company, we must concentrate the best for McCain. Compare to both the company, this report can be concluded by saying that Alpha Renewable Company is best company to perform what the McCain Food is demanding for. Because, their financial analysis and their market position is better than their other competitor. Whenever it is the question of source of funding, we can say that because of the nature of the project (which is environmentally friendly), the government would be the mammoth source of funding, and in addition stakeholders and investor could be the other source of funding as well. This is how; the project may be effective and successful by following up the main objectives of reducing product cost, maintaining corporate social responsibilities and ensuring brand name and reputation.

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