Page 2: Reasons for investment
McCain Foods wants to find ways to maintain competitiveness by reducing costs. It also wants to establish a more sustainable source for the energy it must use.
The sales revenue left over after paying costs is profit. There are two common measures of profit. Gross profit is the difference between sales revenue and the direct costs of production. At McCain these include costs of labour, materials and energy.
Deducting fixed costs from the gross profit gives the other common measure of profit net profit. This money represents a cash flow that allows the company to purchase further resources and provide a return for the shareholders.
McCain has installed wind turbines and a wastewater treatment system at the Whittlesey plant. These will provide alternative and sustainable sources of energy. However, the two projects together cost nearly £15 million.
McCain therefore needed to evaluate the expected financial benefits of both projects before the company could decide to proceed.
- In the cash flow analysis of the two projects, the cash outflows are the initial investment (in year 0) and the maintenance costs (in years 1 to 5).
- The cash inflows represent the savings that the two projects will produce in McCain”s energy bill. They increase over time to reflect the potential savings arising from not paying increased gas and electricity prices.