Midgard Brewing

Midgard Brewing is a micro-brewery with two locations: Interlocken which makes Porter and Bridgeport which makes Pale Ale. Each brewery has a manager who operates fairly independently making decisions on brew recipes and processes, distribution, advertising, in plant restaurants or tasting rooms, and invested capital. Eric Wolfe is the manager of Interlocken and Chris Jarvis is the manager of Bridgeport. Midgard Brewing has a president, Ian James, who sets strategic goals and overall values; oversees corporate functions like accounting, legal and human resources; is responsible for new acquisitions; and participates with brewery managers in new invested capital decisions. Because of the decentralized nature of Midgard Brewing, the brewery managers performance is measured on the basis of Return on Investment (ROI). What follows is the income statement for the year just ended along with invested capital information.

	Income	Statement
	Year ended	Dec 31,2021
	Total	Interlocken	Bridgeport
A. Sales	326,900,000	130,000,000	196,900,000
B. Cost of goods sold	195,000,000	78,000,000	117,000,000
C.Gross Margin (A+B)	131,900,000	52,000,000	79,900,000
D. Selling and administration	94,525,000	37,025,000	57,500,000
E. Segment operating income(C-D)	37,375,000	14,975,000	22,400,000
F. Corporate common cost	11,500,000
G. Net operating income(E-F)	25,875,000
H. Invested Capital	197,500,000	85,000,000	112,500,000
I. Cost of capital	12%	12%	12%

Ian started the company when he returned from a years tour of Europe and European breweries. He wanted to create an organization that created great micro beers, gave employees a great place to work, and contributed to society while respecting the environment. As a result, he created the mission and values statement (attached), a hiring and training process that ensured employees shared the values of the organization, a transparent reporting system, an employee profit sharing system, and corporate community involvement programs. Bridgeport was his initial endeavor and is located in the Fremont Neighborhood of Seattle. After five years he expanded to another location near Green Lake, also in Seattle, and named it Interlocken. As the company grew, Ian hired managers for each of the breweries. Currently, the company is still privately owned and Ian is still the largest stockholder, but the company has a significant amount of employee ownership. While ROI is used to measure manager performance it is also used to calculate employee profit sharing.

The managers meet with the president quarterly to discuss operations, new directions, emerging trends in consumer preferences, the growing micro brewing industry in Seattle, and any new investment opportunities that have come to light. At the first quarterly meeting of the year both managers bring up potential investment opportunities. Eric would like to investigate expanding Interlockens brewing facilities. Chris would like to investigate an opportunity to change the water heating system for the brewing process for Bridgeport. After some discussion Ian encourages both managers to pursue investigation of their respective options. Due to the size of both project, Ian hires your consulting firm to evaluate the projects and provide an analysis and recommendation(s).

Summary of Interlocken Expansion Proposal

The demand for Interlockens Porter has been increasing year over year and if growth continues it is anticipated that within the next few years Interlocken will run up against capacity issues. The expansion of the brewing facility would cost $15 million and would increase the capacity, improve the process which will increase the quality of the beer. Eric anticipates that this project has a ten year timeline. The increase demand and related revenue less additional costs would net the following cash flow for the next ten years:

Net Cash Flow

2021 $2,300,000 2026 $2,850,000

2022 $2,550,000 2027 $2,850,000

2023 $2,750,000 2028 $2,750,000

2024 $2,850,000 2029 $2,750,000

2025 $2,850,000 2030 $2,700,000

Summary of Bridgeport Upgrade Water System Proposal

Bridgeport has enough capacity to meet demand and has been doing very well over the years and anticipates that it will continue to grow and do well. Chris has been investigating new green technology and has found a new methodology for water heating and cooling. Since water is a primary ingredient in beer and a key processing component, this could significantly benefit the company and the environment. The technology will cost $23 million to purchase and install and requires significant retooling of the brewery. The technology will reduce the carbon footprint of the company significantly and will reduce energy cost each year into the future. As production increases so will the energy savings. Chris anticipates that the project has an extended life but for evaluation purposes the company never anticipates projects past 15 years. What follows is the net cash flow savings for the next 15 years:

Net Cash Flow Net Cash Flow

2021 $3,100,000 2029 $3,500,000

2022 $3,100,000 2030 $3,500,000

2023 $3,200,000 2031 $3,600,000

2024 $3,200,000 2032 $3,600,000

2025 $3,300,000 2033 $3,700,000

2026 $3,300,000 2034 $3,700,000

2027 $3,400,000 2035 $3,800,000

2028 $3,400,000

Required:

1. Evaluate both investment opportunities using the net present value method. For simplicity, do not consider taxes. You may also want to evaluate the investment opportunities using other capital investment analysis methods (IRR, Payback and Discounts Payback).

2. While preparing your final report, you present a draft of your findings (question 1 above) to Eric and Chris. Both managers are interested to also understand how these projects might affect Return on Investment (ROI). You agree to update your evaluation by including ROI calculations for the next five years. Based on discussion with the managers you learn that Midgard defines investment in the ROI calculation as the year end book value of the investment.

3. As part of your analysis, you explore how the various constituents might respond to the analysis you have prepared. Discuss the factors that might be important to each group (customers, employees, managers, majority owner). Midgard Brewing has substantial employee ownership and employees participate in profit sharing, employees are trained on reading and evaluating Midgards financial information. Further, major decisions are vetted before the employees. What potential conflicts might arise and how might each group respond to these proposals?

4. Write your final recommendation to Ian related to the proposed investments? Include any other recommendations you might have for Ian and Midgard. Explain. This should be in the form of a consultant letter (e.g., executive summary).