Capital Budgeting Methods and Cash
PRAIRIE WINDS PASTA
In the early 1990s, the farm economy in the heartland of the United States was weak. Farmers in North Dakota produced hard, amber Durham wheat and exported 75% to Italy for the production of high quality pasta. Prices for raw wheat fluctuated radically, depending on weather and growing conditions. Many farmers were having difficulty meeting payments for the expensive farm machin- ery required for crop production. Small family farms were disappearing and non-farm jobs in the area were scarce. Although consumers were paying record prices for food, many farmers felt that processors, who converted the raw grains into finished products for sale in…show more content… The high demand for the company products resulted in difficulty filling orders for its cus- tomers. Because of the rapid inventory turnover in the retail grocery trade, customers demand delivery within one week with a maximum allowance of 10 days. It generally takes four to five days lead time for Prairie Winds Pasta to put a specific product into production and an average of 4 days to ship the product to the customer. The 30 different varieties of pasta and rapid inventory turnover resulted in high levels of non-production time required to switch production from one type of pasta to another. Prairie Winds was experiencing difficulties satisfying existing customers on a timely basis. Several of the large grocery store chains had indicated that they might switch sup- pliers if they could not get a reliable shipment of goods.
To help mitigate the immediate supply crisis, Steve arranged for the Italian machinery tech- nicians to fine-tune the existing machines and increase capacity by 10 percent. However, Steve was not sure how long the equipment would be able to operate under this type of production schedule.
Steve was concerned about the potential loss of customers and suggested that Prairie Winds purchase a second pasta production machine for $40 million. The company had excess space in the existing facility that could be used for the new machinery. However, this space currently was leased to another company on a year-to-year basis and was generating annual rent of