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Capital Budgeting Analysis of a Vertically Integrated Egg Firm: Conventional and Cage-Free Egg Production

Carlos J.O. Trejo-Pech and Susan White

Applied Economics Teaching Resources (AETR), 2020, vol. 2, issue 4

Abstract: This case features a financial analyst building a capital budgeting model of a stylized vertically integrated egg firm. The case describes the egg industry and the role played by large firms, and highlights the potential for continuing fast growth of cage-free eggs in the near future. Cage-free eggs may grow rapidly at the expense of conventional eggs because of (1) recent regulation requiring producers to switch from conventional to cage-free production, and (2) pledges by large egg buyers such as McDonalds, Starbucks, Walmart, and more than 200 restaurants and supermarkets, to buy cage-free only products by 2025. The case discusses how investment, production, and financial statement parameters are collected and assembled by the analyst to prepare a capital budgeting model, which might be used to evaluate the financial performance of an egg firm managing a portfolio of conventional and cage-free eggs. The reader is challenged to analyze how investment, leverage, and profitability may change under two hypothetical investment policies. A quick-investment policy would capture a scenario on which the cage-free market grows quickly in the following years and therefore the egg firm would invest aggressively in cage-free facilities, in sync with the market. A second investment policy captures a slower cage-free growth scenario.

Keywords: Teaching/Communication/Extension/Profession (search for similar items in EconPapers)
Date: 2020
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DOI: 10.22004/ag.econ.307148

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