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Potato Best Products 70 CAPITAL BUDGETING METHODS AND CASH FLOW ESTIMATION

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Potato Best Products 70 CAPITAL BUDGETING METHODS AND CASH FLOW ESTIMATION Directed In the early 1990s, the rural economy of northern Maine was weak. Much of Maine’s agricultural production came from potatoes sold as fresh bulk produce. Potato prices fluctuated radically, depending on weather and growing conditions. Many farmers were having difficulty meeting payments for operating expenses and debt maintenance. Small family farms were disappearing and nonfarm jobs in the area were scarce. Although consumers were paying record prices for food, many farmers felt that the middlemen controlled the industry and were generating the bulk of the profits. Karl Maynard, a third-generation potato farmer, operated one of the largest and most successful farms in the area. He kept up with trends in the industry and was involved with agricultural extension programs. He also was well respected and an active community leader. He began investigating the possibilities associated with dehydrated vegetable products and believed a manufacturing plant using dehydration technology could help diversify the local economy. He was aware of a successful potato processing plant in Oregon that was established and operated by the local growers. With the coming of the mud season, Karl decided to visit the Oregon plant and determine firsthand how the facility operated. He arranged to meet with company executives and the production manager to see if a similar plant could operate in rural Maine. His visit was extremely fruitful: Not only did he determine that a potato processing operation could be profitable, but Tommy Foster, the plant manager and a Maine native, expressed an interest in helping develop the new operation. Karl returned home and started talking to other growers. The farmers were convinced that vertical integration, combining the production and processing of their potatoes, would help them gain control over their product and help with diversification. In 1991, Potato Best Products Co-op was formed, and three hundred growers in Maine and Canada purchased shares. They pledged a specific volume of potatoes, at a set price, for the production of dehydrated potato products. In weak markets farmers would have an outlet for their crops, and in strong markets farmers could make money on the guaranteed sale of their potatoes as well as a profit on the finished product. The co-op hired Tommy Foster to get the effort operational, and in 1993 Potato Best Products opened a $35 million production facility. The operation was located on two rail lines and had decent highway access for distribution. The co-op bought state-of-the-art dehydration equipment from the manufacturer and made arrangements with the company to get the equipment in place and running. The co-op produced a variety of dehydrated potato products for retail grocery stores and packaged it under customers’ store labels

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