Case Study:

GREEN HARVEST
CANNING CO.
PRESENTATION OF CASE

GREEN HARVEST CANNNING CO.

Armand Aguila, head of the New Business Division of the food

processing company, Verona Food Products (VFP), was evaluating the
proposed acquisition of a small canning plant from an agricultural
school. VFP has been looking at opportunities to expand its
production facilities. The canning plant offered a chance for VFP to set
up a production facility close to the source of supply of fruits and
vegetables. Aguila prepared the estimates of costs, investments, and
revenues.
PRESENTATION OF CASE

The Canning Plant

Eastern Luzon Agricultural College (ELAC) was a state-owned institution of

about 4,500 students offering degrees in agriculture, forestry, and food
processing technology, among others. Located in the middle of the rich
farmlands of Isabela, it had built a reputation as a quality training ground for
students in agribusiness and food processing. ELAC maintained close
relationships with the surrounding community. The college shared agricultural
technologies with farmers and cooperatives in the area.
In 1991, ELAC received a financial grant from a foreign government to expand
its food processing facilities. Before that time, ELAC used a makeshift food
laboratory for small student projects.
PRESENTATION OF CASE

The foreign donation was a complete fruit and vegetable canning plant that came
late in 1991. The installed equipment included food preparation equipment like
peelers, blenders, pulpers, finishers and trimmers, separation equipment like filter
press and centrifuge, steam-jacketed kettles, homogenizers, retorts, and can sealers.
The total investment cost for the equipment was P42 million. The initial concept for
operating the food processing plant was to involve students and graduates of ELAC
under the supervision of a full-time professional manager and a few technicians. A
faculty member managed the plant in 1992 and performed pilot production runs of
canned fruits and vegetables. A not-for-profit foundation was set up, headed by the
president of ELAC Arsenio Pedrosa, and became the business entity for the plant. In
the same year, ELAC made arrangements for the contract growing of vegetables and
purchasing of fruits in the area. The plant canned sweet corn, tomato paste, green
peas, red pimiento, ripe mango and pineapple.
PRESENTATION OF CASE

Verona Food Products

Verona Food Products, Inc., was an established business in food processing and
canning with three plants located south of Metro Manila. The head of its New Business
Division, Armand Aguila expressed interest in the purchase of the ELAC canning plant.
At present, VFP’s operations involved trucking fruits and vegetables into their Metro
Manila factories. VFP wanted to explore other regional markets and to located plants
closer to the source of supply.
During a visit to the canning plant, VFP’s production experts found the physical plant
to be in reasonably good condition. There were some imbalances in the capacity of
machinery that prevented full utilization of the plant’s assets. VFP concluded that the
ELAC plant was suitable for seasonal canning rather than for year-round factory
production. Some changes in the equipment layout, waste disposal and minor repairs
in the building were also necessary, at an estimated cost of P3.75 million. The
appraised value of the plant and equipment was P36 million. The plant would not
require major repairs over the next few years.
PRESENTATION OF CASE

Because of the employment of students, ELAC operated the canning plant only during
the harvest season. These were the four months from April to July. The months of June
and July accounted for some two-thirds of the company’s total production. In 1994, the
plant produced canned vegetables and fruits with a total sales value of P102 million.
This production was about 40 percent of the total production capacity of the canning
plant during the four-month canning season.
ELAC purchased vegetables and fruits from contract growers in farms around the
campus. The arrangement with growers involved cash advances from the ELAC
Foundation of up to 40 percent of production costs. The foundation deducted this
amount from the sales proceeds upon delivery by farmers at harvest. The production
process required workers to operate simple machines and employed students and a
few skilled workers. ELAC sold the products under the brand “Green Harvest” at
Manila outlets.
PRESENTATION OF CASE

Green Harvest Canning Co.

The management of VFP saw potential profits if it operated the canning plant as a low-
cost factory during periods of the year when there was surplus harvest. Aguila
proposed that VFP directly market the canned vegetables and fruits under the same
distribution of VFP while keeping the “Green Harvest” brand. He found that ELAC’s
marketing was weak and that their outlets did not push the product. Management of
VFP required that canning operation be limited only to the months of surplus harvest in
the area. Management wanted to cancel all contract growing agreements. Instead, it
was to purchase vegetables and fruits from various farmers and traders at best prices.
To increase efficiency, management would employ regular workers instead of students
and graduates of ELAC. This policy would improve the reliability of production,
although wages and employee benefits would be higher. To ensure good relationship
with ELAC, management planned to allow ELAC to use the plant as a student
laboratory during off-season under supervision by plant supervisors.
PRESENTATION OF CASE

VFP proposed to start a new company, to be called the Green Harvest Canning
Company, to spin off the project from VFP at the outset. It was the policy of the VFP
management to operate its ventures on a financially independent basis. VFP did not
guarantee any loan made by subsidiaries although it often provided management and
marketing support.
Aguila prepared a five-year sales target for 1996-2000, as follows:
SALES FORECAST (in thousand pesos)
1996 102,800
1997 126,000
1998 150,000
1999 174,000
2000 198,000
PRESENTATION OF CASE

His plan was to extend the production period from the current four months to
six months, from March to August. This plan would be feasible, he thought,
since the company would purchase fruits and vegetables over a wider area to
take advantage of seasonal glut in supply. For the months when the canning
plant would be idle, management would transfer workers to other VFP plants
at no further cost to Green Harvest Canning. Based on cost study under the
plan, a schedule of cost and revenues was prepared for the current volume of
production, shown as Exhibit 1. The direct costs reflected the wages of full-time
but seasonal workers and cost savings due to the purchasing of fruits and
vegetables at seasonally lower prices. The administrative expenses included
the fixed annual cost of allowing students to use the plant during the off-
season.
Exhibit 1
PRESENTATION OF CASE

Aguila wanted to estimate the working capital requirements of the company, based on
his sales forecast and production cost estimates. Outlets paid their accounts within
average period of 30 days. Vegetables and fruits were to be purchased on twice-
weekly, spot price and cash basis. Cans and other materials were to be purchased on a
30-day credit terms but purchased the month before production. Because of the
patterns of production of the main products, canning output was expected to be 50
percent in June and July, with the rest spread out about equally for the four other
months. Meanwhile, management planned to sell 80 percent of its production to VFP
about evenly from July to December and the balance of 20 percent, from January to
June each year. VFP wanted this delivery schedule to ensure a continuous flow of the
“Green Harvest” brand to the market and to use the ample warehouse space of Green
Harvest Canning. The company would keep only a minimal inventory of factory
supplies. Sufficient storage space was available for the canned products, tin cans, and
other materials.
PRESENTATION OF CASE

Evaluation of the Project

Aguila wanted to prepare a report on the estimated financial rate of return on

the proposed investment. Per VFP guidelines, new projects should yield an
expected rate of return if at least 15 percent. The guidelines require that
forecasts be limited to five years and terminal values be set equal to book
values at the end of five years. Aguila tried to firm up his estimates of revenues,
costs and investments.
Aguila was eager to see whether the ELAC canning plant project met VFP’s
standard of acceptability. There were some risk areas that he needed to identify
and evaluate for his report.
GUIDE QUESTIONS

1. Estimate the rate of return of the project. Is it

acceptable to VFP?
2. What factors determine the acceptability of the
project to VFP? What steps can VFP take now to
position itself well against those factors?
3. How much investment shall VFP require to 06
implement the plan?
Estimate the rate of return of the project. Is it
acceptable to VFP?

ROI = Final Value of Investment − Initial Value of Investment × 100%

Cost of Investment
= P36,000,000 – P33,000,000 x 100%
P42,000,0000
= 7.1429%
What factors determine the acceptability of the project to
VFP? What steps can VFP take now to position itself well
against those factors?
Factors Steps VFP need take now to position
itself well against those factors
Resale value of assets on terminal • Good maintenance service of the
period machineries to be able to sell them
• Depreciable assets (machinery and as used assets (with higher resale
equipment) value)
• Physical assets (degree of • Calculate expected values of NPV
appreciation of real property) and IRR of the project
• Intangible assets (good reputation • Calculate the resale value of the
project through determination of the
present value of future cash income
Inflation rate and tax Retain more of its income instead of
declaring high dividends
How much investment shall VFP require to
implement the plan?

NEW ASSET

Acquisition cost P33 million

Direct Attributable Costs (DACS) P3.7 million

Total P36.7 million

CASE STUDY ANALYSIS
VIEWPOINT

Armand Aguila
Head of the New Business Division of Verona Food Products (VFP)

● This business dealing considers the continuity and

revision of the existing business acquired from Eastern
Luzon Agricultural College (ELAC).
● Aguila has to set up planning and decision making back
up by financial planning with the use of capital budgeting
techniques.
● It takes into account the business future with the planned
ventures and expansion.
TIME CONTEXT

Year: 1995

● It is a period when there is limited access to higher

version of technologies.
● This case study will contextualize problem and
solution in current setting.
DEFINITION OF THE PROBLEM

Armand Aguila needs to determine whether to invest in new

business that will maximize the capacity of the plant,
warehouse and resources of the company by establishing a
subsidiary company or redirect the company into other
ventures.
OBJECTIVES

The following points are set objectives to pursue the efficiency of

financial planning capital budgeting techniques:
1. To identify the internal and external forces of the company that
will help the management to utilize its assets, capitalize the
opportunities, and mitigate the level of risks.
2. To use financial tools or techniques to identify the business
feasibility
3. To plot a strategic plan in the development of new business
venture
AREAS OF CONSIDERATION
STRENGHTS WEAKNESSES
• There is ready skilled workforce • High turnover of skilled workers because they
• Available capital sources of capital such as are either students or on part-time basis
donation • Imbalances in the plant capacity and inefficient
• Good market share performance of the machinery (only at 40%)
• Favorable supplier credit terms and sales on
account terms for the customers
• Sufficient storage and warehousing of finished
goods

OPPORTUNITIES THREATS
• Seasonal production means opportunity for • Business risks involves in agriculture such as
business diversification. Green Harvest is an pests, change in climate conditions, and
example of feasible business. typhoon in Luzon (although the seasons April
• Maximization of the value of the business by to June are summer)
utilizing the 100% production of the machinery • Threats of new market competition in Luzon
and facilities of Vera Food Products (existence of suppliers in Northern part which
are also supplier in Metro Manila)
ALTERNATIVE COURSE OF ACTION # 1

Invest in new technology – consistent business development is achieved

using a new machines and technologies.

● Advantage:
○ New technology means efficiency of production, output
is competitive
● Disadvantage:
○ Additional capital requirement plus labor skills
ALTERNATIVE COURSE OF ACTION # 2

Designing an ad hoc department – functional only during peak seasons

that demand is high.

● Advantage:
○ Cost is minimized and applicable only during the
production seasons
● Disadvantage:
○ Opportunities are limited in an ad hoc division because
it is not sophisticated unlike with a continuous business
division that is designed in all seasons of production.
ALTERNATIVE COURSE OF ACTION # 3

Third party sourcing – that will cater the production of the canning
company

● Advantage:
○ Sharing of risk of business loss, smooth transition of
process
● Disadvantage:
○ Management has no direct control to the third party
RECOMMENDATION

ACA 1: Invest in new technology – consistent business

development is achieved using a new machines and technologies.
RECOMMENDATION, continued

● The rate of return of the project is 28%, investment is greater than

the rate of return of 15% required by the management.
● The 28% is the Accounting rate of return derived from total profit
of 11.3M over initial investment of 39.75M.
● The project will also yield at 3.5 yeas payback period greater than
five years acceptable period of the company.
RECOMMENDATION, continued

● Thus, the recommendation is to use ACA 1 or to invest in new

advanced facility. This new venture can be incorporated in setting
up of new subsidiary named “Green Harvest Canning Company”.
● New technology investment includes the training and hiring
skilled people that will help in the production and development of
the business.
● The requirement for this investment should be 50M which
considers the allocation 39.75M facilities and 10.25M for the other
working capital expenditures during the development of the
business.
ACTION PLANS
The action to set the business with the new technology investment recommends the
below table order of action plans:
Action Plan Objectives Responsibility Budget Timetable
BOD Planning To set the top management the task of Board of Directors N/A 2 Weeks
investment and project management and Management
Committee

Sourcing of Funds To collect and capitalize available Board of Directors Capital 2 Months
resources of the company coming from Requirement is
either investments or bank loans P50M

Project Management Management committee dealing the Management N/A 2 Months

overall direction of the project and the
business
Acquisition and Set Gather skilled individual required in the Operations N/A 6 Months
up production and management
Production Commencement of the project Operations 40M operations 1 Year (one
expenditures business cycle)
Project Evaluation To evaluate the results of the project and Management N/A 2 Weeks
see if there are need to be revisited or
enhance.
Thank you for kind attention!