Question- Read the case study. Analyze the Project Risk and Project Exclusion concerning Existing Plant Expansion

CASE: Queensland Food Corp

In early January 2003, the senior-management committee of Queensland Food Corp was to meet to draw up the firm's capital budget for the new year. Up for consideration were 11 major projects that totaled over $20.8 million. Unfortunately, the board of directors had imposed a spending limit of only $8.0 million; even so, investment at that rate would represent a major increase in the firm's asset base of $65.6 million. Thus the challenge for the senior managers of Queensland Food Corp was to allocate funds among a range of compelling projects nominated for consideration.

The Company

Queensland Food Corp, headquartered in Brisbane, Australia, was a producer of high-quality ice cream, yogurt, bottled water, and fruit juices. Its products were sold throughout two states (Queensland, New South Wales) and two territories (ACT and Northern Territory). (See Exhibit 1 for map of the company's marketing region.)

Exhibit 1 - Queensland Food Corp, located in Australia

Queensland Food Corp sales had been static since 2000 (see Exhibit 2), which management attributed to low population growth in Northern Territory and market saturation in some areas. Outside observers, however, faulted recent failures in new-product introductions.

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

Most members of management wanted to expand the company's market presence and introduce more new products to boost sales.

Resource Allocation

The capital budget at Queensland Food Corp was prepared annually by a committee of senior managers who then presented it for approval by the board of directors. The committee consisted of five managing directors, the president Chief Executive (CEO), and the chief finance officer (CFO). Typically, the CEO solicited investment proposals from the managing directors. The proposals included a brief project description, a financial analysis, and a discussion of strategic or other qualitative consideration.

As a matter of company policy, investment proposals at Queensland Food Corp were subjected to two financial tests, payback and internal rate of return (IRR). Financial tests were considered hurdles and had been established in 2001 by the management committee and varied according to the type of project:

Exhibit 3 -Company Policy for Project Approval

Project Type	Minimum Acceptable IRR	Maximum Acceptable 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

In January 2003, the estimated weighted-average cost of capital (WACC) for Queensland Food Corp was 10.5 percent. In describing the capital-budgeting process, the CFO, Tony Austin, said, "We use the sliding scale of IRR tests as a way of recognizing differences in risk among the various types of projects. Where the company takes more risk, we should earn more return. The payback test signals that we are not prepared to wait for long to achieve that return."

At the conclusion of the most recent meeting of the directors, the board voted unanimously to limit capital spending in 2003 to $8.0 million.

Existing Plant Expansion. In addition to the need for greater production capacity in Queensland Food Corp's southeastern region, its Cairns' plant had reached full capacity. This situation made the scheduling of routine equipment maintenance difficult, which, in turn, created production-scheduling and deadline problems. This plant was one of two highly automated facilities that produced Queensland Food Corp's entire line of bottled water, mineral water, and fruit juices. The Cairn's plant supplied Northern Territory and Queensland (the major market).

The Cairn's plants capacity could be expanded by 20 percent for $1.0 million. The equipment ($700,000) would be deprecated over seven years, and the plant over ten years. The increased capacity was expected to result in additional production of up to $150,000 per year, yielding an IRR of 11.2 percent. This project would be classified as a market extension.

Answer the following with reference to Existing Plant Expansion

PROJECT EXCLUSIONS

Describe explicitly what is not within the scope of the project. When identifying project boundaries consider the following: Types of artifacts, functionality, organizations, and life project cycles/ phases. To help prevent scope creep, be sure to confirm project scope (what is included & what is excluded) aligns with sponsor / key stakeholder expectations.

PROJECT RISKS

This is arguably one of the most important sections of the charter. All projects face risk during their life cycle. While it may not be possible to eliminate risks, they can be anticipated and managed to reduce probability of occurrence &/or their impact. . At project initiation, the sponsor identifies HIGH LEVEL risks that could result in the project failing entirely or not meeting project objectives. An essential part to this process is the creation of a Sponsor Risk Tolerance Matrix (see example below) which can help the Project Manager to define the appropriate risk response strategies. Risk response strategies should be guided by the sponsor's risk tolerance.

Sponsor Guidance for Risk Tolerance

Project Constraint	No Tolerance	Some Tolerance	High Tolerance
Scope
Schedule
Cost
Quality

Project Risk Summary (Risk response guided by the sponsor's tolerance level)

Project Risk	Probability	Impact	Priority	Management Strategy / Actions
	H/M/L	H/M/L	H/M/L