Chapter 16 Costs for Decision Making
C16.39.
Note to Instructor: The purpose of this case is to familiarize students with
information about an organization’s capital expenditures that may appear in its
annual report. This solution uses Campbell Soup Company’s 2014 annual report,
For the year 2014: (Note: Dollar amounts in millions)
a.
1.
Additions to plant assets amounted to $347 and new businesses acquired
a.
2.
Additions to plant and assets were $336 and $323 in 2013 and 2012,
respectively, and the only other business acquisition took place in 2013 for
$1,806. Sales of plant assets amounted to $5 and $1 in 2013 and 2012
respectively, and the no other business sale took place in 2013 or 2012.
b.
During 2014, the company’s aggregate capital expenditures were $347 million.
The company expects to spend approximately $400 million for capital projects
in 2015. Major 2015 capital projects include a Bolthouse Farms beverage and
salad dressing capacity expansion project, the ongoing implementation of a
C16.39.
(continued)
c.
The company’s ability to meet its objectives with respect to the acquisition of
new businesses or the divestiture of existing businesses may depend in part on
its ability to identify suitable buyers and sellers, negotiate favorable financial
terms and other contractual terms, and obtain all necessary regulatory
approvals. Potential risks of acquisitions also include:
Acquisitions outside the U.S. may present unique challenges and increase the
company’s exposure to risks associated with foreign operations, including
foreign currency risks and risks associated with local regulatory regimes. For
d.
1.
Capital expenditures were $347 million in 2014, $336 million in 2013 and $323
million in 2012. Capital expenditures are expected to total approximately $400
million in 2015. Capital expenditures in 2014 included capacity expansion at
Pepperidge Farm (approximately $48 million); the ongoing initiative to
simplify the soup-making process in North America (also known as
the soup common platform initiative) (approximately $22 million); broth
capacity expansion (approximately $15 million); continued enhancement of the
company’s corporate headquarters (approximately $12 million); a flexible
beverage production line for Bolthouse Farms (approximately $11 million); the
C16.39.
(continued)
d.
1.
company’s Australian biscuit plants (approximately $32 million), Pepperidge
Farm’s 34,000-square-foot innovation center (approximately $20 million),
d.
2.
Fixed assets and amortizable intangible assets are reviewed for impairment as
events or changes in circumstances occur indicating that the carrying value of
the asset may not be recoverable. Undiscounted cash flow analyses are used to
determine if an impairment exists. If an impairment is determined to exist, the
e.
1.
Property, plant, and equipment are recorded at historical cost and are
depreciated over estimated useful lives using the straight-line method.
e.
2.
Acquisitions
On August 8, 2013, the company completed the acquisition of Kelsen Group
A/S (Kelsen). The final all-cash purchase price was $331. Kelsen is a producer
of quality baked snacks that are sold in 85 countries around the world. Its
C16.39.
(continued)
e.
2.
On June 13, 2013, the company completed the acquisition of Plum (PBC Plum).
The final all-cash purchase price was $249. Plum is a leading provider of
premium, organic foods and snacks that serve the nutritional needs of babies,
toddlers, and children.
The acquisition of Plum contributed $88 to Net sales and resulted in a decrease
On August 6, 2012, the company completed the acquisition of BF Bolthouse
Holdco LLC (Bolthouse Farms) from a fund managed by Madison Dearborn
Partners, LLC, a private equity firm, for $1,550 in cash, subject to customary
purchase price adjustments. On August 6, 2012, the preliminary purchase price
adjustments resulted in an increase in the purchase price of $20. In the third
quarter of 2013, the purchase price adjustments were finalized and reduced to
$11. Bolthouse Farms is a vertically integrated food and beverage company
focused on developing, manufacturing, and marketing fresh carrots and
proprietary, high value-added products.
C16.39.
(continued)
e.
3.
Discontinued Operations
On October 28, 2013, the company completed the sale of its European simple
meals business to Soppa Investments S.à r.l., an affiliate of CVC Capital
Partners. The all-cash preliminary sale price was €400, or $548, and was
subject to certain post-closing adjustments, which resulted in a $14 reduction of
e.
4.
Business Segments
C16.39.
(continued)
f.
2012
$7,175
$323
4.50%
2011
$7,143
$272
2010
$7,085
$315
1.
2.
(Millions)
Net
Capital
Sales
Expenditures
Ratio
2014
$8,268
$347
4.20%
2013
$8,052
$336
4.17%
Total
Net
Assets
Plant Assets
Ratio
2014
$8,113
$2,318
28.57%
2013
$8,323
$2,260
27.15%
2012
$6,530
$2,127
2011
$6,862
$2,103
2010
$6,276
$2,051
3.
as a greater percentage of total assets during 2012.
The data indicate that both net sales and capital expenditures have increased
steadily from 2010 to 2014, the most recent five-year period; however, capital
only 4.20%. A closer examination of management’s discussion and analysis of
financial conditions should provide more comprehensive detail as to
Campbell’s strategic direction and the changing business environment.
Chapter 16 Costs for Decision Making
TAKE-HOME QUIZ: CHAPTER 16 NAME______________________
1. Management of Lakeside, Inc. is considering an investment in an expansion of the company’s
product line. The estimated investment required will be $162,500. You can assume that the
full amount will be invested at the beginning of 2013. The estimated cash returns from the
new product line are shown in the following table. You should assume that the returns are
received at the end of each of the years indicated, and that Lakeside, Inc.’s cost of capital is
12%.
Year
Estimated
Cash Return
2016
$36,000
2017
48,000
2018
60,000
2019
72,000
a. Calculate the present value of the cash returns. Show the present value factors and
amounts in the space to the right of the cash returns in the above table.
b. Calculate the net present value of the investment.
c. Calculate the profitability index of the investment.
d. Estimate, but do not calculate, the Internal Rate of Return of the product line expansion.
e. Calculate the payback period of the investment.
f. Based on your quantitative analyses, would you recommend that the product line
expansion project be undertaken?
g. Identify some qualitative factors that you would want to consider with respect to this
investment.
Instructor’s Manual / Solutions Manual
TAKE-HOME QUIZ KEY: CHAPTER 16
a.
Year
Cash Return
12% PV Factor
Present Value
2016
$36,000
0.8929
$ 32,144
2017
48,000
0.7972
38,266
2018
60,000
0.7118
42,708
2019
72,000
0.6355
b.
Investment ………………………………………………………
$(162,500)
Present value of inflows …………………………………………
158,874
Net present value…………………………………………………
$ (3,626)
d.
The internal rate of return will be less than the cost of capital – about 11%.
e.
Year
Cash Flow
Cumulative
Cash Flow
2016
$36,000
$36,000
2017
48,000
84,000
2018
60,000
144,000
2019
72,000
216,000
f.
No, because the return on investment does not equal or exceed the cost of capital.
g.
rather than all at once?
What are the probabilities of achieving the estimates? Could the expansion of this
product line increase profits from other product lines? What is the firm’s incremental