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case2_03 - Capital Budgeting with Staged Entry 16B ATLANTIC...

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Capital Budgeting with Staged Entry 16B ATLANTIC AQUACULTURE, INC. Directed The board and senior executives of Atlantic Aquaculture, Inc., a leading seafood farmer, harvester, and processor, scheduled a meeting in early 1996 to consider a major change in its corporate strat- egy. Atlantic’s long-standing policy has been to concentrate solely on raising, harvesting, and pro- cessing specialty seafoods from the northern Atlantic Ocean. The company’s products include lobster, salmon, and clams. Atlantic raises about one-third of the seafoods it processes in off-shore pens, and it purchases the remainder under contracts with independent fishermen. Management had chosen not to deal with other varieties because it wanted to concentrate on the higher-priced end of the seafood market. However, increased competition from low-cost foreign producers has hurt profits, and over-harvesting and pollution have decreased the fish and shellfish populations, result- ing in significantly lower yields. Furthermore, consumers are becoming more price conscious and are avoiding more expensive seafoods in favor of less expensive freshwater fish, especially catfish and freshwater trout, and chicken. Individuals who had at one time preferred to eat red meat are now turning to fish as a more healthy diet alternative, but the freshwater producers are capturing most of that rising market. This combination of factors has prompted Atlantic to reconsider its basic strategy, and man- agement is now thinking of making a major move into the freshwater fish market by raising and har- vesting rainbow trout. The company was founded in 1948 in Maine by a consortium of commercial fishermen whose plan was to provide Americans throughout the country with fresh North Atlantic specialty seafood. Atlantic’s sales in 1995 were $39 million, and its net income was $900,000. The company’s seafood is regarded as being of the highest quality, and the firm has the reputation of being a leader in its chosen field. Still, for the reasons cited above, the profit trend has been down- ward in recent years, and unless there are fundamental changes, losses will eventually occur. All prior proposals to enter the trout market were rejected because Atlantic’s operating and marketing advantages were in specialty seafood (saltwater products). Furthermore, management previously had not regarded the trout market as having enough profit potential to make the invest- ment worthwhile. Recently, though, slow economic growth throughout the country has led to mas- sive layoffs which have forced consumers to be more price conscious with their fish selections, and consumer demand for freshwater fish throughout the United States has increased. Conse- quently, entering the freshwater fish market may provide an attractive investment opportunity. Mar- keting the product under Atlantic’s name and thus capitalizing on its reputation for quality and Copyright © 1994. The Dryden Press. All rights reserved.
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freshness will increase the probability that the project will be financially successful. Finally, a few
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