Mcreath Corporation Case

BUS 433a: Company Valuation and Value Creation

Spring 2012, AUBG

McReath Corporation Case

Scenario Analysis

McReath Corporation is a leading producer of fresh, frozen, and made-from-concentrate citrus drinks. The firm was founded in 1922 by Charles McReath, an army veteran who settled in Jacksonville, Florida, after World War I and began selling real estate. Since real estate sales were booming, McReath's fortunes soared. His investment philosophy, which

he proudly displayed behind his desk, was "Buy land. They aren't making any more of it." He practiced what he preached, and he invested most of his sales commissions in land located in Florida's Indian River Counfy. Originally, McReath sold his oranges and grapefruit to wholesalers for distribution too grocery stores, but in the 1940s and 1950s, when juice sales were expanding, he joined with several other producers to form McReath Corporation, which then expanded into juice processing. Today, its SunJoy, Florida Gold, and Citrus Delite brands are sold thmughout the United States.

McReath's management is currently evaluating a new product - fresh lemonade. The new product would cost more, but it is superior to the competing lemonade products made from reconstituted lemon juices. Joan Glass and Will Smith, recent business school graduates, who are now working at McReath as financial analysts, must analyze this project, along with two other potential investments, and then present their findings to the company's executive committee.

Production facilities for the fresh lemonade product would be set up in an unused section of McReath's main plant. Relatively inexpensive used machinery with an estimated cost of only $250,000 would be purchased, but shipping costs to move the machinery to McReath's plant wouid total $20,000, and installation charges would add another $30,000 to the total equipment cost. Further, McReath's inventories (raw materials, work-in process, and finished goods) would have to be...